Mumbai, Dec. 21: Backed by strong inflows and foreign exchange reserves, the Reserve Bank today further liberalised exchange control regulations by lifting ceiling on banks to offer foreign currency-rupee swaps and doubled the cap on exporters/importers to book forward contracts up to $ 100 million without documentary evidence.
Forex circles, who were pleasantly surprised by the RBI measures, pointed out that it was an indication of the movement towards full convertibility. “Conditions are much better with forex reserves at a record high and a high level of dollar inflows from export proceeds and NRI remittances,” an analyst from a private bank said.
Others pointed out that the RBI relaxations may put the rupee under pressure as demand for the dollar could now increase. “The markets can go out and merrily speculate,” he added.
The apex bank explained that it has made these relaxations as part of the ongoing liberalisation of exchange control regulations and taking into account the stable market conditions and healthy foreign exchange inflows.
Banks would now have the freedom to offer hedging facility to foreign direct investments and will be able to freely invest in overseas money and debt market instruments. Earlier such hedging required prior approval of the RBI on a case-to-case basis. “This move, which will protect the investor from a currency loss, is a huge comfort factor and it could also step up FDI in the country,” an observer said.
The central bank said foreign banks would not be required to hedge their Tier I capital over six months. All these facilities would be available up to March 31, 2003, subject to review, it added.
Further, banks have been permitted to invest in the overseas money market/debt instruments any amount as decided by the banks’ management. Earlier, they were permitted to invest only up to 50 per cent of their “unimpaired Tier I capital” or $ 25 million (whichever is higher) in the overseas market.
As regards foreign currency–rupee swaps, the apex bank permitted banks to offer such swaps without any limits in order to facilitate customers to hedge their foreign currency liabilities. Earlier, banks were permitted to access the market only up to $ 50 million while offering this product to customers.
A currency swap is a contract that commits two parties to an exchange over an agreed period, two payments in different currencies, at an exchange rate agreed at the commencement of the contract.
The RBI also allowed booking of forward contracts based on past performances. Exporters / importers are now permitted to book forward contracts up to the extent of average of past three years’ export/import turnover, without production of documents, subject to the condition that at any point of time, the outstanding contracts shall not exceed 25 per cent of eligible limit, subject to a cap of $ 100 million.
Earlier such forward contracts outstanding could not exceed $ 50 million. Forward contracts deliver a specific amount of one currency against another currency at a stipulated rate on a future date.