India: Exporters Must Convert Holdings To Rupees

Discussion in 'Economy & Infrastructure' started by Son of Govinda, May 11, 2012.

  1. Son of Govinda

    Son of Govinda Regular Member

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    India: Exporters Must Convert Holdings To Rupees - WSJ.com

    MUMBAI (Dow Jones)--India's central bank on Thursday gave local exporters 15 days to convert half their onshore foreign-exchange holdings into rupees, a drastic move aimed at stopping a slide in the currency that is exacerbating inflation, the trade deficit and other trouble spots in the nation's economy.

    The measure helped the rupee gain 1.6% against the U.S. dollar at one point Thursday in anticipation of the estimated billions of dollars that Indian exporters will have to convert into rupees later this month. The order doesn't affect foreign companies based in India.

    But the rupee gave up most of its gains by later Asian trade, an indication that investors widely viewed the move by the Reserve Bank of India as a desperate attempt to shore up a currency that has lost value in recent months due to growing concerns about the shape of the Indian economy, including large budget and trade deficits and a lack of economic reforms.

    "All of this doesn't necessarily solve the underlying problem," said Rajeev Malik, a Singapore-based analyst with CLSA Asia-Pacific Markets, a brokerage. "I think of it as applying balm as opposed to taking medicine."

    Until recently, India was regarded as one of the most-promising emerging markets, with economic growth of 8% and a young population. A series of policy missteps have shaken that image gravely in the past two years.

    Investors are nervous about the country's inability to get its finances in order--concerns that have made the rupee one of the worst-performing major currencies in Asia.

    The government is running a gaping budget deficit because of spending on huge welfare programs and a failure to raise its tax haul. Its trade deficit has mounted because of a slowdown in export growth as demand in the U.S. and Europe has cooled. Rising oil-import costs have widened the trade deficit and stoked inflation, even as annual economic growth in recent months has slowed to below 7%.

    Meanwhile, the government's failure to institute reforms meant to make it easier for foreign investors such as Wal-Mart Stores Inc. WMT +0.27% (WMT) to pump money into the economy have further hurt sentiment.

    There was more bad economic news Thursday, as data showed vehicle sales in April grew 3.4% year-to-year, the slowest pace in 10 months, due to higher fuel and vehicle prices. The government disclosed that the trade deficit narrowed slightly in April from the previous month to $13.4 billion, but remained high. In addition, a senior trade official said exports would likely grow by a maximum 15% in the year ending March 31, 2013, down from than 21% growth last year.

    The flow of bad news has scared investors in India's currency, bonds and stocks. After gaining as much as 9% against the dollar in the first two months of 2012, the rupee is back in negative territory and is close to its record low of 54.29 set on Dec. 15. The benchmark Sensex index has fallen 7.5% over the past three months.

    Last month, ratings company Standard & Poor's warned that it might downgrade India's foreign-currency debt to high-yield, or "junk," status over the next two years if the government doesn't take drastic measures to turn its massive trade and budget deficits around.

    The latest order for Indian exporters to convert half their foreign-currency holdings to rupees illustrates how the central bank is running out of options, many analysts said.

    "The RBI has exhausted all of its straight options and now it has moved towards micromanaging the currency," said Moses Harding, head of global markets at IndusInd Bank. "This will, at best, provide a correction, but not a trend reversal because the rupee is in a bearish mode."

    Indian exporters are allowed to hold overseas earnings onshore in special zero-interest accounts to help them keep a ready source of foreign exchange for business. The cumulative size of these accounts isn't known but market estimates put it at about $7 billion.

    The Reserve Bank of India said exporters must get these accounts to zero before they can buy foreign exchange from the market. Companies lambasted the move as making it more difficult for them to manage their foreign-currency exposures.

    Rostow Ravanan, chief financial officer at software firm MindTree Ltd. (532819.BY) said the steps will create operational challenges for big information-technology companies, which have significant operations in the U.S. and Europe that they fund out of their foreign-currency earnings accounts.

    Industries that rely on imports also complained about the move. "We have asked the RBI to relax the rules for sectors with a high import intensity, such as gems and jewelry and petroleum," said Ajay Sahai, director general of the Federation of Indian Export Organizations.

    Others said companies could always get around the rules by under-reporting money made abroad, which can be stashed in offshore accounts.

    "If exporters have a negative view on a currency, they will find ways, including under-invoicing, to get around some of the restrictions," said CLSA's Malik.

    The government's approach is seen as taking piecemeal regulatory actions rather than attacking the cause of the problem.

    In March, the government proposed draft legislation that would have imposed new tax obligations on foreign-investment deals, in a bid to narrow the budget deficit. After a chorus of complaints from foreign officials and investors, the government on Monday said it was delaying the legislation until next year.

    Since the rupee's record low in December, the central bank has been attempting to stem the currency's losses, but without success. That month, it took measures to damp speculation by imposing restrictions on forward contracts.

    Also in December, the bank allowed commercial lenders to offer higher interest rates to nonresident Indians to attract them to move more money back to onshore rupee accounts.

    In recent weeks, the RBI has been intervening aggressively to prop up the rupee, according to dealers. But with foreign-exchange reserves of $295 billion, or equal to seven months' worth of imports, the bank doesn't have an adequate war chest to defend the currency, analysts said.

    -By Sudeep Jain, Dow Jones Newswires; [email protected]
     
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  3. SLASH

    SLASH Senior Member Senior Member

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    I prefer transacting in rupee as it shield me from up and down in the exchange rate.
     
  4. cir

    cir Senior Member Senior Member

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    I thought India was a free country?

    Now exporters are being forced to convert their foreign currency holdings into fast depreciating rupees?

    What's next??
     
  5. trackwhack

    trackwhack Tihar Jail Banned

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    Importers need forex, exporters not so much. It's harsh but will be temporary.
     
  6. Yusuf

    Yusuf GUARDIAN Administrator

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    Actually helps them too. They get more rupees for the dollar.

    Yeah India is a free country. That doesnt mean their are no laws and regulations.
     
  7. Yusuf

    Yusuf GUARDIAN Administrator

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    Rupee a few positive steps from re-stabilizing: Deutsche Bank


    MUMBAI: The exchange rate only a few positive steps from re-stabilizing, says Deutsche Bank. Capital account measures taken by the regulator coupled with direct intervention in the forex market could help bring correction in the spot rate.

    "The expectation has been that a mixture of FX intervention and capital account measures would restore exchange rate stability," says Deutsche Bank in its report, "If these measures don't bear fruit, more could be on the way, such as taking oil importers out of the FX market and providing them with dollars directly from the RBI, further tariff or restriction on gold import, rebates or other measures to encourage more exports"

    The RBI has taken several measures between December and May in order to boost capital account inflows and curb speculation.

    RBI increased the ceiling on FCNR deposits from 125 to 200 basis points for maturities between 1-3 years and 300 basis points for deposits maturing between 3-5 years. The ceiling rate on foreign currency export credit has been deregulated. RBI deregulated the ceiling on NRE or non resident external deposits and ordinary non resident deposits on December 15.RBI revised the all-in-cost ceiling on external commercial borrowing from 300-350 basis points in November for tenors between 3-5 years.

    On Thursday, the RBI had asked exporters to convert 50% of their dollar balances in their exchange earners' foreign currency accounts into rupee terms in the next fortnight, which is expected to bring in $2.5 billion into the country. The RBI also asked banks to limit their intraday net open positions to five times of their net over night open positions to minimise volatility in the markets.

    The rupee on Thursday closed at 53.44 per dollar and is currently trading at 53.59 per dollar, weaker from its previous close.

    Rupee a few positive steps from re-stabilizing: Deutsche Bank - The Economic Times
     
  8. sehwag1830

    sehwag1830 Tihar Jail Banned

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    Chinese should stop talking about freedom when they can't decide how many babies they can produce.China is a slave country as far as i am concerned.
     
    panduranghari likes this.

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