Forex outflow curbs may be eased further

From The Economic Times

NEW DELHI: After taking steps to curb capital inflows into the country through participatory notes (PN), the government may consider further easing of outflows.

Though the central bank had recently allowed Indian companies to invest more funds overseas and individuals to remit upto $2,00,000 per annum without its permission, sources said some more measures could be on the way.

RBI, which has allowed Indian companies to invest up to 400% of their networth in joint ventures or wholly-owned subsidiaries under the automatic route, could look at raising it further. Even the remittance scheme for individuals, which saw a hike in the ceiling to $2,00,000, could see some relaxation.

However, this could be mainly on the procedural front or by way of a broadening of instruments in which these funds are allowed to be invested in. At present, the scheme allows individuals to remit it only for the specific purpose of investing in assets like real estate or shares or park it with banks. However, there is no clarity on the instruments in which an individual can park these funds.

While the proposed restrictions on inflows through PN may be able to address the issue of inflows, investments can always come in directly, again posing the same problem of inflows for the central bank. The notional value of PNs outstanding, which was at Rs 31,875 crore in March 2004, has grown to Rs 3,53,484 crore by August 2007.

This is about 51.6% of assets under custody of foreign institutional investors. Even if a smaller percentage of this comes directly as FII investment, it would still mean substantial flows. Sources said these measures may be considered to ease outflows if inflows continue to threaten the overall monetary situation. The central bank had mopped up $12 billion in the last week of September.