RBI may ease norms to boost forex outflow

The Reserve Bank of India is expected to do a balancing act by further liberalising limits on the foreign exchange outflow to tackle the capital inflow and its impact on inflation.

Sources close to the development said, in its ensuing monetary policy, the central bank was likely to raise the limit on corporate investment abroad and the ceiling on individual remittances overseas.

In a phased manner, RBI has liberalised limits on the overseas investment by companies from 200 per cent to 400 per cent of their networth.

Sources said many Indian companies were now acquiring large companies overseas and there was a case for further easing of controls. The liberalisation is being proposed since India has had a comfortable foreign exchange situation, according to sources. Foreign exchange reserves were estimated at $312 billion on April 11.

Similarly, there is a case for further relaxation of limits on individuals to remit funds overseas. RBI has already relaxed the limit in a phased manner from $25,000 to $2,00,000.

However, gifts and donations have been kept out of this ambit. The roadmap for capital account liberalisation has also included a gradual increase in the ceiling.

Recently, RBI raised the limit on the overseas investment by mutual funds from $5 billion to $7 billion.

Meanwhile, RBI is also planning to relax several norms for exporters. To start with, the banking regulator may raise the spread for post- and pre-shipment credit from the current cap of 250 basis points below the London Inter-Bank Offered Rate (Libor), to make it a more viable option for banks.

Similarly, the government will continue to subsidise the rupee export credit by banks. Exporters get credit below the prime lending rate (PLR) for various commodities and this spread below the PLR ranges from 250 basis points to 650 basis points. One basis point is one hundredth of a percentage point.

Post- and pre-shipment credit is of short term in nature and provided to exporters in foreign currency. Due to the dollar crisis in the overseas market, the borrowing cost for banks has gone up from 50 to 60 basis points over Libor to a high of 100-150 bps over Libor.

The Libor is the international interest rate benchmark for bank borrowings.