India has announced a slew of measures with immediate effect to curb the slide in the rupee after it reached a record low last Friday.
The Reserve Bank of India, in consultation with the government, decided on Monday to raise the limit of external commercial borrowings (ECBs) of Indian companies for repayment of outstanding Rupee loans. This will be applicable for companies in the manufacturing and infrastructure sectors.
The ceiling for such ECBs was lifted by $10 billion to $40 billion. This would be helpful for companies as foreign currency loans are cheaper than the rupee loans.
The maximum investment limit for foreign institutional investors (FIIs) in government securities, otherwise known as G-secs, was also lifted by $5 billion to $20 billion.
Further, conditions applicable for the FII investment in infrastructure debt and non-resident investment in infrastructure funds were further rationalized in terms of the lock-in period and residual maturity.
A finance ministry official reportedly said that the lock-in period for some long-term infrastructure bonds will be one year instead of three years.
Qualified Foreign Investors can now invest in those mutual fund schemes that hold at least 25 percent of their assets in infrastructure sector under the current $3 billion sub-limit for investment in mutual funds related to infrastructure.
The government is also planning to reduce the rate of withholding tax on ECBs to 5 percent from 20 percent within a month, television channel CNBC TV18 reported.
Such a reduction was earlier proposed in the 2012-13 budget presented on March 16 for three years for seven sectors - power, airlines, roads and bridges, ports and shipyards, affordable housing, fertilizer and dams.
It was also reported that the government is exploring a relaxation of the withholding tax on investments in corporate bonds.
Finance Minister Pranab Mukherjee on Saturday said the government will announce measures to boost market conditions in consultation with the central bank.
Earlier in the day, Mukherjee said he will resign on Tuesday to contest the Presidential polls. Top government officials hinted that more steps would be announced soon to strengthen the rupee and boost growth.
The Indian economy expanded 5.3 percent during the quarter ended March 2012, the slowest pace in nine years. The RBI left the key policy rates unchanged on June 18 as high inflation left less scope for any rate cut.
Markets had expected the government to announce more aggressive measures including an interest rate cut by the central bank. The country's benchmark index BSE Sensex shed its gains after the latest measures disappointed.
The Indian rupee, which hit a record low 57.32 last Friday, erased its early gains against the U.S. dollar in afternoon trading on Monday after the RBI announcement. The rupee has been hovering near 57 since then, down from 56.38 ahead of the news.
Elsewhere today, Moody's maintained the Stable outlook on India's sovereign rating despite credit challenges. But Standard & Poor's as well as Fitch Ratings warned India on its economic prospects. Recently, both agencies have downgraded India's rating outlook to Negative.
by RTT Staff Writer
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