The proposed relaxation of norms for foreign direct investment and overseas investment is likely to have a positive impact on the rupee, money market experts said.
This move will bring more inflows in India, which will increase dollar liquidity in the market, leading to a fall in the currency exchange rate.
“The Indian rupee may have a positive impact as the government has proposed to relax norms for FDI and overseas investments,” said Dilip Parmar, a foreign exchange analyst at HDFC Securities.
In the Union Budget for 2024-25, tabled on July 23, the government proposed simplification of rules and regulations for FDI and overseas investments.
Finance Minister Nirmala Sitharaman said in her budget speech that this will facilitate foreign direct investment, nudge prioritisation, and promote opportunities for using the Indian National Rupee as a currency for overseas investments.
Some experts said that higher inflows because of this will be absorbed by the Reserve Bank of India (RBI), which will lead to further increase in foreign exchange reserves of the country.
However, this will also have an impact on the liquidity in the banking system because dollar buying by the central bank will increase systemic liquidity.
Experts said that to remove that liquidity the central bank may also conduct more variable rate reverse repo auctions. The higher liquidity in the banking system can pose a risk to the inflation numbers.
Today, the rupee closed record low at 83.6937 against the US Dollar after the government raised tax rates on capital gains in the Budget. “Today’s record low closing was mainly due to such announcements made in the Budget on the taxation front,” Parmar said.
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