The Reserve Bank of India (RBI) yesterday increased the limit on foreign investment in government bonds by $5 billion (Dh18.36 billion) to $20 billion along with a few other minor measures, which many analysts said will not be enough to strengthen the rupee.
“The RBI came up with such as modest step to calm the markets when there were huge expectations on it and government to introduce measures that encouraged fund flows into the country. The disappointment of the market was immediately reflected in terms of a further decline in the exchange rate of rupee immediately after the RBI announcement,” said Pradeep Unni, Senior Relationship Manager at the Dubai-based commodities trading firm Richcomm Global Services DMCC.
Despite the immediate negative reaction from the market, analysts including Unni believe that the RBI measures will have some psychological impact on the market and would act as deterrent against any further big slide in rupee’s exchange rate in the coming weeks.
The central bank announced yesterday that Long-term investors such as sovereign-wealth funds, multilateral agencies, endowment, insurance and pension funds as well as foreign central banks will be allowed to buy the securities. The combined limit on sovereign and corporate debt was last increased to $60 billion from $50 billion in November.“Overall it’s positive as the higher limit means more fund flows to the country,” said Raghav Nateshan, a forex analyst with Vysya Bank.
Analysts said India needed to improve its economic fundamentals, including addressing its current account deficit, to bolster the rupee.”The market was expecting a slew of measures. The measures announced now won’t have any direct material bearing on the rupee. Unless the RBI comes in with more measures, the rupee will fall back to the 57-58 to a dollar levels,” said M. Natarajan, head of treasury at Bank of Nova Scotia in Mumbai.
Agrees Unni. “Unless strong policy measures are announced to attract longer term foreign investments into the country, rupee is likely to remain in the range of 55 to 57 and in the absence of any policy indications from the government could face further slide,” he said.
Bankers and analysts say key to restoring market’s confidence in rupee and rupee denominated assets depends on genuine efforts to rein in India’s ballooning fiscal and current account deficits.
Morgan Stanley estimates India’s current account deficit will widen to $72 billion by the end of June, from $49 billion a year earlier. That would put the current account deficit at between four per cent and 4.5 per cent of India’s GDP.from gulfnews.com