Bloomberg News

India Eases Rules to Boost Dollar Supply After Rupee Slumps

November 24, 2011

(Updates rupee, stock index in fifth paragraph.)

Nov. 24 (Bloomberg) -- India’s central bank loosened rules for companies to borrow abroad and raised the interest rate on bank deposits by its citizens living overseas to help stem the decline in Asia’s worst-performing currency.

Companies borrowing abroad can now pay as much as 3.5 percentage points over the London Interbank Offered Rate for loans longer than three years and up to five years, raising the cap by 50 basis points, or 0.5 percentage point, according to a central bank statement in Mumbai yesterday. For non-resident Indians, the spread over Libor was increased between 25 basis points and 100 basis points for two different deposit plans.

The measures follow after the rupee plunged to a record low this week on concern Europe’s debt crisis will hurt demand for emerging market assets. Restraining the rupee’s slide will aid the Reserve Bank of India’s fight against inflation, which is the highest among BRIC nations.

“The RBI needs to respond because the currency’s decline stokes inflation risks,” said Deepali Bhargava, chief economist at Espirito Santo Securities in Mumbai. “We may see more steps to support the rupee because the global uncertainties may not end soon.”

The rupee rose 0.3 percent to 52.23 per dollar at 10:43 a.m. in Mumbai, according to data compiled by Bloomberg. It touched an all-time low of 52.73 on Nov. 22 and has plunged 15 percent in 2011. The BSE India Sensitive Index lost 1.1 percent to 15,526.22, headed for its lowest level since Nov. 3, 2009.

Overseas Loans

The central bank kept the cap on rates for overseas loans of more than five years unchanged at 500 basis points over Libor, according to the statement. It also relaxed rules for currency swaps to check the rupee’s drop.

“Our approach is that we balance out the short-term risk of uncontrolled spiral with medium-term risk of potentially prolonged market turbulence,” Reserve Bank Deputy Governor Subir Gokarn told reporters at the Boao Forum for Asia conference in Paris yesterday. “That is the balancing act we want to do.”

The central bank aims to counter “sharp” movements in the rupee, Gokarn said.

India’s benchmark wholesale-price inflation was 9.73 percent in October. By comparison, consumer prices rose 7 percent in Brazil, 5.5 percent in China and 7.2 percent in Russia in the same month.

The Reserve Bank has increased its repurchase rate by 375 basis points in 13 moves since mid-March 2010.

--With assistance from Mark Deen in Paris. Editors: Cherian Thomas, Abhay Singh

To contact the reporter on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net.

To contact the editors responsible for this story: Hari Govind at hgovind@bloomberg.net Sandy Hendry at shendry@bloomberg.net


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