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Measures from Modi’s economic review to control CAD positive; these additional steps needed, say experts

Experts say that the measure taken with regard to ECB borrowings will help the rupee to gain stability.

After the PM Narendra Modi-led government announced a slew of measures to shore up the rupee and control the current account deficit in yesterday’s economic review meet, experts said that the steps will have a positive impact in the medium-long term and called for additional steps to consider. Notably, in the economic review meeting chaired by PM Modi, the government has announced various steps including scrapping withholding tax on masala bonds, reduce non-essential imports, provide ECB access of up to $50 million for to manufacturing entities from maturity of one year, review mandatory hedging conditions for infra loans with respect to External Commercial Borrowings and removal of exposure limit of 20% of Foreign Portfolio Investors’ corp bond portfolio to a single corp group and 50% of any issue of corp bonds.

“These are very positive measures but I wish more was done. The measures unlikely to help immediately but will help in medium-long run,” Keki Mistry, CEO of HDFC told CNBC TV18. According to the expert, the government should tweak masala bond rules more, to make it more palatable, such as a shorter tenure and automatic approval. Further, he called for strengthening of the trade balance.

Experts say that the measure taken with regard to ECB borrowings will help the rupee to gain stability. “The measures, both the ECB, as well as the one year relaxation now, is clearly asking domestic industries to take dollars at this juncture, and leave it unhedged. At the same time, the FPI investors are being encouraged to take a long position in rupee. Masala bonds will be interesting. This 5% withholding tax was making a difference of 40 basis points. All in all the government is not taking a position themselves, but encouraging both domestic and overseas participants to take a position on rupee, this is interesting,” Ananth Narayan, Professor of Finance at SPJIMR told ET Now.

“As far as the rupee is concerned, we are reading far too much into its depreciation vis-à-vis the US dollar. If you look at all the composite indicators looking in terms of what the real exchange rate is and what is happening to rupee against other competing currencies and trade-weighted exchange rates, I don’t think we have such a ground to worry,” TCA Anant, former chief statistician told CNBC TV18.

Notably, the motive of the meeting was to analyse the health of the economy and decide if any intervention measures are required to stem the fall of rupee and rising oil prices. Experts say that the government will have to weigh its options wisely on oil payment for Iran crude.

Source: Financial Express