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As FM reposes faith, RBI effects temporary hikes in CRR and repo rate to shore up rupee

On Wednesday, Finance Minister Yashwant Sinha said he had full confidence in the Reserve Bank of India measures to stop the further slide of the rupee.

On Thursday, the RBI announced a number of monetary measures to arrest the seemingly uncontrollable slide in the value of the rupee. The apex bank has increased the cash reserve ratio to be maintained by commercial banks with the RBI by 100 basis points, up to 11 per cent from ten per cent. The repo rate has been hiked by 300 basis points to eight per cent.

An RBI statement said the hike in CRR is temporary and added that the package of measures were in view of the recent developments in the foreign exchange market.

The new CRR will be effective from August 29, the central bank said,, adding that the rise in repo rate will be reviewed periodically keeping in view the liquidity conditions.

Also, authorised dealers have been allowed to offer forward cover to foreign institutional investors in the equity markets to the extent of 15 per cent of the value of their investments as on June 11. This is in addition to the facility already available for incremental investments.

The RBI had earlier permitted FIIs to book forward cover for their incremental value of their equity investments.

The RBI has withdrawn the facility of rebooking cancelled contracts for trade related transactions covering imports. However, the contracts can be rolled over on or before maturity. However, this facility will continue to be available in the case of exports. At present, this facility is allowed only for trade related transactions.

The facility of splitting forward and spot legs provided to corporates, which covered their forward committments by first locking into a forward rate and then covering the spot, has been withdrawn. According to the RBI, the decision was prompted by a few corporates which ''misused'' the facility by booking and cancelling the spot without taking a forward cover.

Exporters have been permitted to use balances in the exporters' earners foreign currency accounts for all business-related payments in India and abroad at their discretion including payments of airfare and hotel expenditure. But the apex bank favours exporters using their EEFC balances for effecting payments abroad.

The RBI has said if there is evidence of ''wilful'' delays in repatriation of exports proceeds, it will reduce the entitlement or withdraw the facility of maintaining EEFC account.

From now, the RBI will consider applications for extension of time limit to repatriate exports' proceeds beyond the due date only in ''exceptional'' cases, where the delay in realisation is on account of external circumstances beyond the control of the exporter.

In addition, authorised dealers will have to report, at the close of business every day, their open position as at 1000 hours as also the peak intra-day position.

Yesterday, talking informally to reporters in New Delhi after the investiture ceremony of the commissioners of excise and customs, Sinha said the RBI has fixed the interest rates as part of its credit policy and it was for the central bank to fix the interests rates.

When told about rumours about a further slide in the rupee's value, Sinha said, ''I don't comment on rumours.'' He said it was for the RBI to decide on any policy on interest rate.

When his attention was drawn to former RBI governor Dr Chakravarthy Rangarajan's observation that economic growth would be seven per cent in the medium term, Sinha said, ''When I told you the same thing, you did not believe it.''

He said more than five per cent industrial growth rate as per the statistics during the first quarter of the year was much better than more than three per cent growth in the previous year.

Sinha said the year's results are broken into four parts. The first quarter's results show a slowdown in various parameters, but there was nothing to be discouraged about. The economic growth rate was likely to pick up during the course of the year.

UNI