Explainer: Government steps up efforts to save the rupee and attract dollars

By Prarthana Mitra

The government on Friday announced crucial measures to defend the rupee at its all-time low, weeks after it was falling consistently despite intervention from the Reserve Bank of India. The set of five measures rolled out by the centre seeks to attract dollars and further check the current account deficit (CAD). Plans have also been drawn to cut down non-essential imports and increase exports, Finance Minister Arun Jaitley announced at the hurriedly-convened press conference on Friday.

“Necessary decisions will be taken and announced as and when they’re taken,” Mr. Jaitley said, indicating that the government will intervene to contain the fallout of the current volatility in the forex market. Latest RBI data showed that the forex reserves fell below the $400 billion mark for the first time over the last one year.

Here’s what the situation demands

The decision was made by Prime Minister Narendra Modi and his cabinet after a careful perusal of the economic situation with RBI governors and economic experts. It will involve several measures to ease overseas borrowing norms for manufacturing companies, relax restrictions on foreign portfolio investors (FPI) investment in corporate bonds and provide tax benefits on Masala bonds.

Relax restrictions

The government will start with reviewing will review and relax restrictions on their investments in order to attract more foreign portfolio investors (FPI) into the corporate debt market. The conditions that FPIs cannot invest more than 50% of an issue of corporate bonds, or more than 20% of its corporate bond portfolio in a single corporate entity, will also be reviewed.

Masala bonds

The finance ministry will also push Indian corporates to withhold tax and take the masala bond route (rupee-denominated bonds issued abroad by Indian borrowers), which had been suspended until March 31, 2019. This means even if the rupee undergoes further depreciation, it will not affect the borrower. Furthermore, restrictions will be removed from Indian banks to market-make or underwrite such bonds.

Manufacturing sector

The government has also said it will review the condition that mandates hedging for infrastructure loans borrowed under the external commercial borrowing (ECB) route. Finally, manufacturing companies that have loans of $50 million through ECBs will be allowed a one-year term as opposed to the three-year term.

Prarthana Mitra is a staff writer at Qrius


Foreign CurrencyIndiaIndian RupeeRupee depreciation