Mumbai, Aug. 14: The Reserve Bank of India (RBI) today clamped down hard on overseas remittances by domestic companies and individuals.
The central bank brought down the limit for remittances made by resident individuals to $75,000 in a year from $200,000 earlier under the Liberalised Remittance Scheme (LRS).
LRS allows Indians to remit funds abroad for specific purposes such as investment in mutual funds, purchase of property, shares, and debt securities or venture funds. It also allows individuals to open bank accounts abroad for this purpose.
The RBI today ruled that remittances under the scheme can no longer be used to acquire immovable property abroad. The fresh clampdown will also apply to gift and loans in rupees made by resident individuals to NRI close relatives.
Data from the central bank show that during 2012-13, outward remittances under the LRS stood at $1.2 billion with nearly $77.7 million being accounted for by purchase of immovable property while $236.9 million went into investment into equity or debt.
Capital controls on wealthy individuals wasn’t the end of the story. The RBI also brought down the limit for overseas direct investment (ODI) by domestic companies by almost one-fourth.
In a circular issued in the evening, the RBI said this limit, which now comes under the automatic limit, has been reduced from 400 per cent of the net worth of an Indian entity to 100 per cent of its net worth. This limit will also apply to remittances made under the scheme by an Indian company investing overseas in the energy and natural resources sectors.
It may be recalled that a host of Indian companies, particularly from these two sectors, have been investing in overseas entities to acquire raw material security.
The RBI added that any proposal which was in excess of the revised requirement (100 per cent of the net worth) will be considered under the approval route. Foreign exchange experts said the central bank would be extremely choosy while granting approvals under such proposals.
The lower limits will, however, not apply to navaratna public sector undertakings (PSUs), ONGC Videsh Ltd (OVL) and Oil India Ltd (OIL).
Data from the central bank show that forex outflows under the ODI route stood at over $3.2 billion this July, up from $1.71 billion in the preceding month. Forex circles estimate the outflows from this route to be around $10 billion in a year.
The RBI explained that it was taking these two measures to moderate outflows. “Any genuine requirement beyond these limits will continue to be considered by the RBI under the approval route,’’ it added.
Reacting to the decision, forex circles said it would result in the rupee rallying when trading resumes on Friday.
“It will have a psychological impact and the rupee will gain against the dollar as the capital controls show that the RBI will not hesitate to take tough measures to protect the rupee. We may see the rupee gaining by 30 paise on Friday,” said an analyst with a private sector bank.
The RBI circular was silent on whether the fresh measures on LRS will also impact the foreign currency that a resident individual can carry abroad or spend for his children’s education abroad.
Since the facility under the scheme is in addition to those already available for private travel, business travel, gift remittances, donations, studies, medical treatment according to Schedule III of Foreign Exchange Management (Current Account Transactions) Rules, 2000 and the latter has not been revised, it indicates that the existing limits of $10,000 per year on personal or private visits abroad will stay.
However, the restrictions did not appeal to a few experts who indicated that it could be counter-productive.
“In our view, the RBI measures may have only a minor impact on resident remittances but could have a relatively larger impact on outward foreign direct investment (FDI). Indian companies’ outward FDI have been growing in recent years for various reasons such as pursuing growth markets, technology, natural resource and these could be adversely hit. While the authorities aim to reduce forex volatility, we fear that they may end up sending a panic signal,” said Nomura economist Sonal Varma.
It may be recalled that the central bank has been taking various measures over the past one month to protect the rupee value. However, the currency continued to depreciate against the dollar. Today, it fell 24 paise to an all-time closing low of 61.43 after July inflation rose to a five-month high.
Bait for NRIs
Late in the evening, the RBI accompanied its step of moderating outflows by taking another measure to encourage more inflows from NRIs. It deregulated interest rates on non-resident (external) rupee (NRE) deposits and ordinary non-resident (NRO) Accounts.
According to the current rules, interest rates offered by banks on NRE deposits cannot be higher than those offered by them on comparable domestic rupee deposits.
The RBI also waived the requirement under which banks must maintain cash reserve ratio and statutory liquidity ratio on Foreign Currency Non-Resident Bank [FCNR (B)] and Non-Resident (External) Rupee (NRE) deposits.
Meanwhile, seeking to reduce the import of gold, the RBI today prohibited inward shipment of gold coins, medallions and dores without licence.