COMMENTARY
INTERVIEWS
SPECIALS
CHAT
ARCHIVES

'100 pc forward cover against exchange risk for FII investments will keep the rupee stable'

The bankers and industry associations have welcomed various measures announced by the Reserve Bank of India in its Credit Policy today.

R K Amin, chief forex dealer at the Development Credit Bank Limited, said that the RBI clearly showed that the prevailing political scenerio has not made any impact on the basic policy decision of the central bank.

By announcing half-a-percentage cut in CRR, which was "a little unexpected", the RBI has taken care to see that government's large borrowing does not imbalance the liquidity in the system.

But exporters may feel disappointed without any immediate clear-cut annoucements to support exports. Hundred per cent forward cover against the exchange risk for additional investment made by FIIs after March 31, should be the stablising factor for the Indian rupee, he added.

According to M R Madhavan, analyst at the ICICI Securities and Finance Company Limited, the credit policy has focussed on a number of structural issues. The UTI, the LIC, the IDBI and other money market participants (such as mutual funds), who are permitted to lend money through reverse repos, will also be permitted to borrow through repos.

(Repo: repurchase agreements or ready forward deals, a secured short term -- usually 15-day -- loan by one bank to another against government securities. Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term it will buy back the securities at a slightly higher price, the difference in price representing the interest.)

This, along with detailed guidelines to ensure adequate safeguards and uniform accounting practices, is expected to give a boost to the repos market. The proposed introduction of interest swaps and forward rate agreements will help develop a derivatives market and permit hedging of interest rate risks, Amin said.

He added that money market mutual funds have been permitted to offer cheque-writing facility to their investors. With this move, MMMFs would be in direct competition with banks for saving deposits.

UNI

RBI Governor Bimal Jalan's policy statement

April 20, 1999: The RBI's Credit and Monetary Policy

Business news