The demand for foreign currency, mainly the dollar, has increased because of increasing imports and higher commodity prices
It was expected that the Reserve Bank of India would take steps to give a boost to foreign exchange flows into the country in view of the continuing weakness of the rupee, and so last week’s package was no surprise. The measures are intended to support the rupee, whose weakness poses many challenges, including a negative impact on inflation. The demand for foreign currency, mainly the dollar, has increased because of increasing imports and higher commodity prices. Exports have not grown proportionately. The country’s trade deficit increased in June, and the current account deficit is likely to exceed 3% of the GDP this year. There is an increasing outflow of capital for various reasons. Foreign portfolio investors have continuously sold their holdings from the beginning of the year. This is mainly due to interest hikes in the US and the tendency to minimise risk at a time of global uncertainty.
The package consists of three measures that are intended to increase dollar supplies. Banks have been incentivised to source more NRI deposits by doing away with the requirement to maintain additional reserves for incremental deposits over the next four months. They have been given the freedom to fix interest rates for such deposits without being constrained by existing restrictions. While an increase in foreign currency deposits is welcome, it is a moot point whether banks will be sufficiently incentivised to take that risk in a deteriorating environment. Secondly, rules have been relaxed for foreign portfolio investment (FPI) in the Indian debt market. But the possibility of greater depreciation of the rupee and a high inflation rate, which would make interest rates negative, might make FPIs unattractive in the near future. The third measure in the package is the easing of the conditions to be met by Indian companies to borrow abroad. It is to be seen if companies will be keen to go in for foreign currency loans in an uncertain financial and economic milieu and when interest rates are rising abroad.
While there are questions against each of these measures, even limited gains from them can turn out to be useful. Though the present foreign exchange reserve position at $593 billion does not raise any concern, a combination of capital flight, currency depreciation and inflation can pose serious challenges, especially because India is a net commodity importer. A bigger foreign exchange reserve will help to cushion the impact better. There are some indications that the situation may not get much worse than now. Commodity prices have started showing some moderation and the present FPI outflow can reverse if the US goes into a recession. It is premature to predict the impact of the package, but it can provide a shield if the situation gets worse.
Check out DH's latest videos
Check out DH's latest videos
https://www.deccanherald.com/opinion/measures-to-boost-forex-inflows-welcome-1125504.html
2022-07-10 17:29:00Z
CAIiEKf7wsjyQPY_SMTzIgI6EnUqMwgEKioIACIQjry_YPDACxKLbeLPU-ztoCoUCAoiEI68v2DwwAsSi23iz1Ps7aAw96_FBg
Bagikan Berita Ini
0 Response to "Measures to boost forex inflows welcome - Deccan Herald"
Post a Comment