MC Interview | Bank of Baroda’s chief economist on recent RBI measures

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The Reserve Bank of India (RBI) has announced a series of measures to enhance debt capital inflows and ease pressure on the rupee. The country’s central bank has excused lenders from statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirements on incremental non-resident foreign exchange deposits made into FCNR (B) and NRE accounts; removed the interest rate caps on deposits over one year; allowed more bonds under the FAR, or the fully accessible route; FPIs or foreign portfolio investors can now put in unlimited amounts in bonds that are maturing in less than a year; banks raising foreign loans have been given wider options to lend the money; and companies can now raise ECBs (external commercial borrowings) up to $1.5 billion via the automatic route, up from $750 million earlier.

In an interview with Moneycontrol, Madan Sabnavis, chief economist, Bank of Baroda, shares his views on RBI’s recent measures. Edited excerpts:

Will the recent measures taken by the RBI such as easing of rules on FPIs with regard to domestic bonds help stem the decline in the rupee?

The measures invoked by the RBI on the capital account have the potential to increase foreign inflows and strengthen the balance of payments. The amounts have to be large to counter the CAD (current account deficit) which will in turn stabilise the rupee. However, the impact is still uncertain as investment/deposit flows look at a longer-term horizon.

While the effect will be positive at the margin, the quantum of flows may not be very large as these measures have a defined time limit. Further, with interest rates increasing overseas, the present dispensation may make returns comparable but not higher than what potential savers are getting.

ECBs have become less attractive ever since the rates have gone up in the US and the rupee turned volatile. Therefore, while theoretically these measures should prop up the rupee, inflows may not be large and will flow in only gradually. Therefore, the rupee has maintained its level and not really strengthened except for a very short while on the day following the announcement.

Will measures such as the RBI allowing seven-year and 14-year government bonds, including the existing 7.10 percent due 2029 and 7.54 percent due 2036, to be included in the “fully accessible route” for FPIs help bring down bond yields?

Not really. While the immediate impact will be positive if FPIs evince interest, for yields to come down it is imperative for such flows to be sustained. This will be largely guided by RBI rate action which in turn is dependent on inflation perspectives. Presently, expectations are that the RBI will continue to increase the repo rate, which has kept yields up.

Will the RBI steps lead to an increase in flows in short-term debt? Will this increase arbitrage opportunities?

To a certain extent, yes, there would be an increase in short-term debt provided the total cost is lower than domestic rates. The benefit will be more for larger companies that borrow based on MCLR (marginal cost of funds based lending rate) where the increases have been minimal.

Will this help companies lower their cost of short-term borrowings?

Only to a very limited extent. The RBI is now allowing companies to borrow at a higher cost, which can in fact increase the cost of borrowing.

Will easing of ECB rules such as pricing cap and even size (up to $1.5 billion) under the automatic route help corporates refinance near-term maturities?

This will happen depending on the current mix of loans and their cost. Refinance is used by corporations but given that their cost is up, the net benefit may be limited.

Why is the rupee continuing to be weak despite the RBI moves?

The market does not believe that these measures will alter things much. Further, the dollar has been strengthening against the euro and is close to parity level. Therefore, the rupee continues to depreciate.