To curb the slide in the rupee, the Reserve Bank of India has asked exporters to convert 50% of their dollars held in Exchange Earner's Foreign Currency (EEFC) accounts into rupee. The central bank has also ruled that exporters can henceforth access the forex market for buying dollars only after they have utilized the balance in their EEFC accounts.
CNBC-TV18 has quoted unnamed RBI officials as saying there was roughly USD 5 billion being held in EEFC accounts at present. The RBI rules mean that USD 2.5 billion will have to be converted into rupee. Reacting to the central bank rules, the rupee firmed up to 53.08 to the dollar, compared with yesterday’s close of 53.85.
In its circular to banks, this is what the RBI said:
* 50% of the balances in the 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 may be completed within a fortnight from the date of the circular.
* In respect of all future forex earnings, an exchange earner is eligible to retain 50% (as against the previous limit of 100%) in non-interest bearing EEFC accounts. The balance 50% shall be surrendered for conversion to rupee balances.
* The facility of EEFC scheme is intended to enable exchange earners to save on conversion/transaction costs while undertaking forex transactions in future. This facility is not intended to enable exchange earners to maintain assets in foreign currency, as India is still not fully convertible on Capital Account. Accordingly, EEFC account holders henceforth will be permitted to access the forex market for purchasing foreign exchange only after utilising fully the available balances in the EEFC accounts.
What prompted the RBI move?
Some analysts feel that slide in the rupee could have been aggravated by the actions of domestic players, though factors like the crisis in Eurozone and foreign capital outflows because of uncertainty over tax regulations were the main triggers.
“Unlike the past two episodes or the INR’s (Indian rupee) extreme weakness, this time it was led by domestic players, as evidenced by the spread between 1-Year NDF (non-deliverable forwards) and 1-Year onshore forward points remaining close to zero (it tends to be high and positive if foreign investors lead the INR selling).
Apparently, Indian exporters were holding on to USDs on concerns that the INR would keep falling, and importers had to buy USDs at any level,” says a report by French investment bank Credit Agricole.
While tightening the norms for exporters, the RBI has given some reprieve for banks dealing in the currency market.
The RBI has now set 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. In December last year, RBI had said that the intra-day open position limit should not exceed the erstwhile Net Overnight Open Position Limit available to them.