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India Central Bank Limits FX Holdings Of Exporters To Arrest Rupee's Slide

India Central Bank Limits FX Holdings Of Exporters To Arrest Rupee's Slide
5/10/2012 3:42 AM ET

The Reserve Bank of India, or RBI, on Thursday urged all foreign exchange earners, including exporters, to convert 50 percent of their foreign exchange holdings into Indian rupee in an attempt to curb the recent plunge in the currency. In a statement, the central bank said "50 percent of the balances in the Exchange Earner's Foreign Currency, or EEFC, accounts should be converted forthwith into rupee balances and credited to the rupee accounts as per the directions of the account holder."

This process should be completed within a fortnight, RBI said. For all future forex earnings, an exchange earner is eligible to retain 50 percent in non-interest bearing EEFC accounts as against the previous limit of 100 percent, the bank said. The balance 50 percent shall be surrendered for conversion to rupee balances.

The EEFC account holders will now be permitted to access the forex market for purchasing foreign exchange only after fully utilizing the available balances in the EEFC accounts.

In a separate release, the RBI has also asked banks to restrict their net intra-day open positions in a bid to stem speculation.

The central bank said it is fixing the intra-day open position limit for the banks at five times the Net Overnight Open Position Limit available to them or the existing Intra-day open position limit as approved by the Reserve Bank, whichever is higher. This limit will be applicable for positions involving rupee as one of the currencies.

After the announcement of the new rules this morning, the rupee rose to 52.9450 per dollar, up 1.6 percent from Wednesday's close of 53.8150. The rupee's slide in recent months was due to debt worries in the Eurozone and India's foreign capital outflows owing to uncertainty over the domestic tax regulations.

The currency declined more than 11 percent thus far from a 3-month high of 48.570 hit in early February. The rupee fell to as low as 53.9202 against the dollar on Wednesday, which is almost near a record low of 54.305 hit in December last year.

Thursday's measures are the latest in a number of policy changes announced since last week to curb the rupee slide.

On Wednesday, the bank relaxed the norms on the use of foreign currency deposits by allowing the banks to use funds from non-resident deposits as collateral against lending to residents.

On May 4, following a sharp fall in the currency, the RBI raised the interest rate ceiling on foreign currency non-resident, or FCNR, deposits from 125 basis points above the corresponding LIBOR/Swap rates to 200 bps for maturity period of 1 year to less than 3 years. The ceiling was raised to 300 bps for maturity period of 3 to 5 years.

The bank also decided to deregulate the ceiling rate on export credit in foreign currency by allowing banks to freely determine their interest rates on such credit. This was to enhance the availability of export credit in foreign currency, the bank said last week.

by RTT Staff Writer

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