RBI steps in to shore up rupee

Reflecting its serious concern for the falling rupee, the Reserve Bank of India (RBI) has stepped in yet again with fresh measures to shore up the Indian currency.

The apex bank has directed all exporters to repatriate (nay, sell) forthwith half their foreign exchange earnings.

Hitherto, all foreign exchange earners were permitted to retain their entire foreign exchange earnings in Exchange Earner's Foreign Currency (EEFC) Account with any authorised dealer in India. On a review of this scheme, the apex bank said, “Fifty per cent 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, the RBI said, must be completed within a fortnight.

On future foreign exchange earnings, the RBI said an exchange earner would be eligible to retain only 50 per cent in non-interest-bearing EEFC accounts. The balance had to be surrendered for conversion into rupee balances, the apex bank added.

The RBI had made it clear that EEFC scheme “is intended to enable exchange earners save on conversion/transaction costs while undertaking foreign exchange transaction in future.” As such, the RBI felt, the EEFC facility “is not intended to enable exchange earners to maintain assets in foreign currency.” In this context, the RBI pointed out that India “is still not fully convertible on capital account.”

The apex bank informed the EEFC account holders that henceforth they would be permitted to access the foreign exchange market for buying only after they used up fully the available balances in their EEFC accounts.

The RBI also made it clear that the new provisions would apply to holders of Resident Foreign Currency Account and Diamond Dollar Account.

In a related move, the RBI also placed limit on intra-day open position/ daylight limit of the authorised dealers. This limit is now fixed at five times the net overnight open position limit available to them or the existing intra-day open position limit as approved by the RBI, whichever is higher, for positions involving rupee.

The rupee volatility coupled with stock slump saw the RBI last week up the interest rate ceiling on FCNR (B) (foreign currency non-resident bank) deposits across maturities. It also allowed banks freedom to determine their interest rates on export credit in foreign currency.

The RBI, it appears, is using a combination of tactics — from direct intervention to policy changes — to shore up the rupee.