RBI breather for exporters on foreign exchange earnings

The Reserve Bank of India relaxed some of the restrictions it had placed on the foreign exchange market over the last six months.

On Tuesday, it allowed exporters to retain all their foreign exchange earnings in foreign currency, for a limited period. It allowed them to partially cancel and rebook forward contracts.

The moves appear to be aimed at boosting the turnover in the foreign exchange market. Exporters will also get some relief. But the movement of the rupee will not be impacted by these tweaks.

In May, the RBI had ordered that only half of the foreign exchange earnings could be held as it is in foreign currency in Exchange Earner’s Foreign Currency (EEFC) account.

The move was aimed at stemming the rapid depreciation in the rupee against the dollar

Partial relief
On Tuesday, the RBI gave partial relief to companies by allowing them to retain the entire foreign exchange earnings in EEFC account, but for a limited period only. The foreign currency has to be converted in to rupee on the last day of the month following the month in which the money is received.

For instance, if $1,000 is received on June 14, 2012, it can be parked in EEFC account only till July 31, 2012.

The amount converted to rupee can, however, be reduced to the extent of payment commitments in foreign currency of the company.

Lobbying by industry
According to Mr Abhishek Goenka, CEO, India Forex Advisors, factors such as lobbying by exporters and industry could be behind this move. Banks complaining about contraction in volumes could be another reason why the central bank has backtracked slightly.

Foreign exchange turnover in over-the-counter market is down from daily average of $26 billion in March to $20 billion in June.

It could be to resurrect volumes and activity in forex market that the RBI has now allowed exporters to cancel and rebook 25 per cent of their hedged position.

There were apprehensions of misuse of this facility by exporters. They could buy and sell multiple times with the same invoice as underlying under the guise of adjusting the hedged position. This facility was entirely withdrawn in December last year to curb speculation in rupee.