External Commercial Borrowings limit was lifted to $40 billion from $30 billion earlier. This would be to repay outstanding rupee loans of Indian businesses. This comes as a relief to the manufacturing sector. The rupee loans are expensive while foreign currency loans are cheaper.
The limit on foreign institutional investor investment in government securities in India was enhanced by $5 billion to $20 billion.
Commenting on the measures announced by the RBI, Dr. C. Rangarajan Chairman Economic Advisory Council to the Prime Minister said that the attempt has been to open up larger capital inflows to the country.
He told NDTV profit that these measures should be looked in as an attempt support the depreciating rupee. “There is a mismatch between the capital inflows and the current account deficit. Unless that is taken care of, it won’t help the rupee. Also, the manner in which these measures have been introduced, they will face infrastructure companies,” he added.
He further said that one can expect more such measures to be announced.
Surjit Bhalla, managing director, Oxus Research and Investment, said that these measures are positive for the economy. “The fiscal package the RBI has announced is good. As we want for foreign flows to come in, I think there measures are going to support the cause,” he added.
The BSE Sensex and the Nifty hit the day's low after the central bank’s announcement.
“The market reaction is easy to understand as the market was expecting more coordinated measures to boost the economy,” said Bhalla.
“These are very fine tuned practical measures to help certain sectors,” said Sajjid Chinoy, India Economist at JPMorgan.
“Within the limit which was $15 billion has now become $ 20 billion. I suspect sovereign funds, endowment funds, insurance funds will be filled up pretty soon because they are quite liquid. They will not have an impact on the currency as flows are hedged. So, the impact of those flows will not be on the rupee,” explained Chinoy.
He feels that an announcement on fiscal deficit on FDI in the coming weeks is likely to have a far greater bearing on the currency.