Mid-Term Review of the Annual Policy Statement for 2008-09, RBI Credit Policy, Reserve Bank of India: Banknet India

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Mid-Term Review of the Annual Policy Statement for 2008-09

Part B. Mid-term Review of Annual Statement on Developmental and Regulatory Policies for the Year 2008-09

II. Financial Markets

Foreign Exchange Market

(a) Liberalisation of Foreign Exchange Transactions

140. Measures taken during 2008-09 towards further liberalisation of foreign exchange transactions and improvement of foreign exchange facilities are set out below:

(i) Overseas Investment

Registered trusts and societies engaged in manufacturing/ education/hospitals were allowed to make investment in the same sector(s) in a joint venture (JV) or wholly owned subsidiary (WOS) outside India with the prior approval of the Reserve Bank, subject to compliance with the prescribed eligibility criteria.

Indian entities were allowed to invest in overseas unincorporated entities in the oil sector up to 400 per cent of their net worth as on the date of the last audited balance sheet.

(ii) Overseas Borrowing

Based on a review, the external commercial borrowings (ECBs) policy was modified and accordingly, effective October 22, 2008 ECBs up to US $ 500 million per borrower per financial year are permitted for rupee expenditure and/or foreign currency expenditure for permissible end-uses under the automatic route.

Payment for obtaining licence/permit for 3G Spectrum is considered an eligible end-use for the purpose of ECBs.

The ECBs borrowers have been extended the flexibility to either keep the proceeds off-shore or to remit to India for credit to their rupee accounts with AD Category I banks in India, pending utilisation for permissible end-uses.

In view of the tight liquidity conditions in the international financial markets, all-in-cost ceilings were rationalised and enhanced and accordingly, the ceiling for ECBs of average maturity period of three years and up to five years was enhanced to 300 basis points and the ceiling for ECBs over five years was enhanced to 500 basis points.

Keeping in view the risks associated with unhedged foreign exchange exposures of SMEs, a system of monitoring such unhedged exposures by the banks on a regular basis is being put in place.

The definition of infrastructure for the purpose of availing of ECBs has been expanded to include mining, exploration and refining.

Entities in the services sector, viz., hotels, hospitals and software companies were permitted to avail ECBs up to US $ 100 million in a financial year under the approval route for the purpose of import of capital goods.

The Foreign Currency Exchangeable Bonds (FCEB) Scheme, 2008 notified by the Government of India on February 15, 2008 was operationalised by the Reserve Bank.

AD Category – I banks were allowed to convey ‘no objection’ under the Foreign Exchange Management Act (FEMA), 1999 for the creation of charge over immoveable assets and financial securities and issue of corporate or personal guarantees on behalf of the borrower in favour of the overseas lender to secure ECBs under automatic/approval route, subject to certain conditions.

Banks were allowed to borrow funds from their overseas branches and correspondent banks up to a limit of 50 per cent of their unimpaired Tier I capital as at the close of the previous quarter or US $ 10 million, whichever is higher, as against the existing limit of 25 per cent.

(iii) Trade-related Measures

The limit of US $ 100,000 was enhanced to US $ 300,000 for making remittances for imports where the import bills/documents were received directly by the importer from the overseas supplier.

The limit for advance remittance for import of goods without bank guarantee/stand-by letter of credit was increased from US $ 1 million or its equivalent to US $ 5 million or its equivalent.

The limit for advance remittance for import of services without bank guarantee was enhanced from US $ 100,000 to US $ 500,000 or its equivalent.

The usance period of letters of credit opened for import of platinum, palladium, rhodium and silver has been limited to 90 days from the date of shipment.

(b) Introduction of Currency Futures

141. The final report of the Internal Working Group on Introduction of Currency Futures in India (Chairman: Shri Salim Gangadharan) was placed on the Reserve Bank’s website on April 28, 2008. The report of the RBI-SEBI Standing Technical Committee on Exchange Traded Currency Futures, constituted to suggest a suitable framework to operationalise currency futures, was also placed on the Reserve Bank’s website on June 13, 2008. The recommendations of the Working Group were examined and accepted by the Reserve Bank. Directions were issued under provisions of the Reserve Bank of India Act, 1934 and the necessary Notification was issued under FEMA on August 5, 2008 for the introduction of exchange traded currency futures. The directions permit scheduled commercial banks (AD Category–I) to become trading/clearing members of the currency derivatives segment set up by recognised stock exchanges, subject to their fulfilling certain prudential requirements. Banks which do not meet the minimum prudential requirements are permitted to participate in the currency futures market only as clients, after obtaining approval from the Reserve Bank.

142. The exchange traded currency futures started trading first on the National Stock Exchange on August 29, 2008, followed by the Bombay Stock Exchange and the Multi Commodity Exchange – Stock Exchange (MCX-SX) on October 1, 2008 and October 7, 2008, respectively.

(c) Branch/Liaison Offices in India by Foreign Entities

143. Under the current provisions of the FEMA, a person resident outside India requires prior approval of the Reserve Bank for establishing branch/liaison offices in India. The Reserve Bank has placed on its website for public comments the draft circulars regarding delegation of powers for extension of the validity period or closure of liaison offices of foreign entities in India and the eligibility criteria and procedural guidelines for branch/liaison offices of foreign entities in India with a view to further liberalising the procedure and achieving greater transparency. Final guidelines will be issued by end-December 2008.

(d) Clearing and Settlement of Forex Forwards

144. The CCIL provides a platform for guaranteed settlement of inter-bank foreign exchange trades to banks in India. Settlement is on a multilateral net basis, with the CCIL becoming the central counter-party to the trades through the process of novation. The guaranteed settlement of foreign exchange trades mitigates risks and also allows banks to use their capital in an optimal manner. Currently, 72 banks as members for foreign exchange settlement operations settle, on an average, 8,500 deals daily with a gross volume of US $ 17 billion. Forward trades are accepted for guaranteed settlement only when they enter the spot window.

145. The Reserve Bank has accorded its approval to the CCIL for commencement of guaranteed settlement of inter-bank foreign exchange forward trades from the trade date. The CCIL has notified to banks its readiness to start operations of the foreign exchange forward segment and the software has been fully tested. The CCIL would operationalise the settlement system within a month, once the issues relating to counter-party exposure and risk weights are advised.

(e) Liberalisation of Hedging Facilities

Expansion of Hedging Facilities to Domestic Crude Oil Refining Companies

146. Major domestic crude oil refining companies are permitted to hedge their commodity price risks on overseas exchanges/markets. Major oil refining and shipping companies have been representing to the Reserve Bank for extending the hedging facilities further in view of the volatility of freight rates. With a view to facilitating better management of freight risk, it is proposed:

to permit domestic oil and shipping companies to hedge their freight risk with overseas exchanges/ OTC markets. In respect of other customers who are exposed to freight risk, AD banks may approach the Reserve Bank for permission on behalf of customers.

(f) Trade Credit: Enhancement of All-in-cost Ceilings

147. In view of the tight liquidity conditions in the global credit markets, domestic importers are experiencing difficulties in raising trade credits within the existing all-in-cost ceilings. Considering the international developments, it is proposed:

to enhance the all-in-cost ceiling for trade credits less than 3 years to 6 months LIBOR plus 200 basis points.

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