New Delhi, Feb. 13: The Central government, which expects its foreign exchange reserves to bloat further because of the Gulf war threat and non-resident Indians shovelling more money into term deposits here, is planning to free rules governing purchase of stock derivatives and guarantees by resident Indians abroad against known exposure.
Similarly, all restrictions on hedging those risks by Indian companies saddled with foreign exchange loans will be removed. This will suck out some of the extra money flowing into the country’s foreign exchange coffers even as it improves India’s ‘country risk’. These measures may be expected either as part of the budget package or later as independent moves.
The plan comes despite a warning note sent by the National Security Council to finance minister Jaswant Singh about an expected rise in oil prices to almost $ 40 a barrel if the expected Gulf war drags on and a fall in export earnings, which have been showing an upward trend.
This is because “past experience of the last Gulf War shows that NRIs ship huge quantities of savings back home in such circumstances. Besides, the rupee can be expected to appreciate further against the Euro and dollar which will definitely continue to be under pressure.”
Top finance ministry officials said despite the hit due to an oil price hike and fall in exports, India’s forex reserves will shoot up to $ 76 billion by March-end. The country already has forex reserves of $ 72.4 billion.
At present, about 20 per cent of the forex reserves are trade surplus, FDI inflows are 40 per cent of the reserves, debt, including NRI deposits, are 23 per cent and currency valuation changes 17 per cent.
Between April and November last year, NRI deposits alone brought in $ 2.1 bullion out of a total forex reserves increase of $ 12.6 billiuon during the period. During the same period, external commercial loans were in the negative which meant that Indians were repaying their old loans.
The measures on allowing risk hedging, proposed by the finance ministry, had been recommended by a core group of secretaries some time back as part of a larger set of reform measures.
“These can be expected to help raise the country risk as our loans become more secure with this kind of hedging. It is a normal practice abroad. Global rating agencies factor this in while calculating country risks,” officials said.
India had been at the receiving end of global rating downgrades through last year and things have only now started improving with various rating agencies cautiously upgrading India’s rating. “This can be expected to improve further.”
NRIs have been investing in Indian term deposits mainly on account of arbitrage opportunities as interest rates in Indian banks stand at 5.5-8.5 per cent for a three-year term deposit while it is 3-4 per cent less abroad.