MUCH A 'DO'LLAR ABOUT NOTHING
In its efforts to attract more capital inflows and offer a lifeline to INR, the government and the RBI announced some liberalisation measures that are broadly in line with its infamous track record.
Overall, the measures are positive but perhaps not as significant as markets expected given that those expectations were raised over the weekend by the outgoing finance minister's comments about some major measures. Once again, the government unnecessarily raised expectations only to disappoint.
RBI seems to be taking a more sensible approach while the government appears to be looking for painless quick-fixes that are impractical. The latest set of measures will gradually attract foreign capital but they cannot correct the underlying macro imbalances, such as the unsustainably large twin deficits of fiscal and current account, entrenched inflation and a rapidly depreciating INR.
KEY MEASURES
Boost in external commercial borrowing (ECB) limit to USD10bn. This applies to Indian companies in manufacturing and infrastructure sector that have foreign exchange earnings to borrow overseas for repayment of outstanding INR loans towards capital expenditure and/or fresh INR capital expenditure under the approval route. Note that the overall annual FY13 ECB limit remains unchanged at USD30bn.
Increase in FII limit in local currency G-secs increased by 5bn to USD20bn: The USD5bn increase is for pension/sovereign wealth funds. In order to broad base the non-resident investor base for G-Secs, the RBI has decided to allow long-term investors like sovereign wealth funds (SWFs), multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks to be registered with SEBI, to also invest in G-Secs for the entire limit of USD20bn.
The lock-in period for infra bonds has been cut to 1year from 3 years.
FIIs can buy bonds with 3-year residual maturity.
NEED FOR TOUGH DECISIONS
There are all sensible moves but may not offer immediate relief for INR, which will also come under pressure to weaken further if USD strengthens. Another aspect to this is to what extent would the FIIs be willing to buy sovereign paper given the sluggishness in the economy and the threat of a rating cut.
India's macro imbalances cannot be fixed by a patchwork of Band-aids or by applying balm. The government needs to facilitate several macro adjustments, but some of which may not be politically palatable. So far, it has been busy treating the symptoms rather than fixing the causes of the macro imbalances.
In its efforts to attract more capital inflows and offer a lifeline to INR, the government and the RBI announced some liberalisation measures that are broadly in line with its infamous track record.
Overall, the measures are positive but perhaps not as significant as markets expected given that those expectations were raised over the weekend by the outgoing finance minister's comments about some major measures. Once again, the government unnecessarily raised expectations only to disappoint.
RBI seems to be taking a more sensible approach while the government appears to be looking for painless quick-fixes that are impractical. The latest set of measures will gradually attract foreign capital but they cannot correct the underlying macro imbalances, such as the unsustainably large twin deficits of fiscal and current account, entrenched inflation and a rapidly depreciating INR.
KEY MEASURES
Boost in external commercial borrowing (ECB) limit to USD10bn. This applies to Indian companies in manufacturing and infrastructure sector that have foreign exchange earnings to borrow overseas for repayment of outstanding INR loans towards capital expenditure and/or fresh INR capital expenditure under the approval route. Note that the overall annual FY13 ECB limit remains unchanged at USD30bn.
Increase in FII limit in local currency G-secs increased by 5bn to USD20bn: The USD5bn increase is for pension/sovereign wealth funds. In order to broad base the non-resident investor base for G-Secs, the RBI has decided to allow long-term investors like sovereign wealth funds (SWFs), multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks to be registered with SEBI, to also invest in G-Secs for the entire limit of USD20bn.
The lock-in period for infra bonds has been cut to 1year from 3 years.
FIIs can buy bonds with 3-year residual maturity.
NEED FOR TOUGH DECISIONS
There are all sensible moves but may not offer immediate relief for INR, which will also come under pressure to weaken further if USD strengthens. Another aspect to this is to what extent would the FIIs be willing to buy sovereign paper given the sluggishness in the economy and the threat of a rating cut.
India's macro imbalances cannot be fixed by a patchwork of Band-aids or by applying balm. The government needs to facilitate several macro adjustments, but some of which may not be politically palatable. So far, it has been busy treating the symptoms rather than fixing the causes of the macro imbalances.
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