RBI clamps down on outflows to defend rupee

Reserve Bank of India. File photo

With the rupee staying stubbornly below 61 to a dollar and headline inflation measured in terms of Whole Price Index (WPI) rebounding to 5.79 per cent in July, the Reserve Bank of India (RBI), on Wednesday, stepped in with capital controls to check demand for the American currency.

The fresh initiative on the dollar demand front comes even as the 10-year bond yields surged to a year new high of 8.55 per cent.

The rupee closed at 61.43/44 a dollar compared with 61.19/20 on Tuesday.

While restricting the overseas direct investment (ODI) transactions by resident Indians under the automatic route to 100 per cent of their net worth, down from 400 per cent, the central bank also extended this curb to Indian companies setting up unincorporated entities abroad in select sectors such as energy and natural resources.

However, this reduction in the ODI limit will not apply to public sector undertakings, ONGC Videdsh and Oil India. The new ODI limit comes into effect immediately.

Resident individuals will, henceforth, be able to send out only $75,000 a year under the liberalised remittance scheme (LRS). Hitherto, they were allowed to send out $100,000 a year under the scheme.

They are, however, allowed to set up joint ventures or fully-owned subsidiaries abroad under the ODI route within this LRS limit. Further, the RBI has banned the use of LRS for acquisition of immovable properties abroad.

In the wake of the reduction in the LRS limit, resident individuals can gift or provide loan to the extent of only $75,000 a year and only to their NRI close relatives.

While pointing out that these measures are aimed at moderating outflows, the central bank applied a palliative saying that any genuine requirement above these limits would be considered under the approval route.

Meanwhile, the 91-day treasury bill auction for Rs.7,000 crore on Wednesday saw a yield of 11.427 per cent.

The yield on the 182-day T-bills worth Rs.5,000 crore was 11 per cent. The special repo auction (at 10.25 per cent) did not receive any bid.