Jaitley Announces Five Measures to Curb India's Current Account Deficit, Stabilise Rupee

Ahead of a 'state of the economy' review meeting expected to be held on Saturday, the finance minister also announced that import curbs on non-essential items would be in the offing.

New Delhi: Finance minister Arun Jaitley on Friday night announced a slew of measures aimed at containing India’s current account deficit (CAD), which has since the beginning of the year  widened due to worsening macroeconomic conditions such as surging global oil prices and a falling rupee.

Five steps were unveiled — which mostly deal with easing restrictions on external commercial borrowings and boosting foreign portfolio investor participation in the corporate bond market — after a three-hour-long meeting that was attended by Prime Minister Narendra Modi, Jaitley, senior finance ministry bureacrats and Reserve Bank of India governor Urjit Patel. 

A more official and widely attended ‘state of the economy’ review meeting is expected to be held on Saturday and will be chaired by Modi.

In addition to the five steps, Jaitley also announced that the Centre would soon announce curbs on import of non-essential items and other steps aimed at incentivising India’s exports. Details of the impending steps to cut down on imports  were not announced, with the finance minister saying that further consultation amongst ministries would take place in order to ensure that they were compliant with World Trade Organisation (WTO) norms.

India’s current account deficit widened to a four-quarter high at 2.4% of gross domestic product (GDP) in the April-June period from 1.9% in the January-March quarter of 2017-18. What has added to the macroeconomic mess is a falling rupee and rising fuel prices. In this year, the rupee has depreciated more than 12% on a widening CAD and higher oil prices. On Friday, the rupee was trading at 71.65 against the US dollar, slightly better than its closing of 72.19 on Wednesday.

Global crude oil prices, a looming trade war and external factors like American policy decisions have resulted in the outflow of dollars and have had an impact on India despite our strong fundamentals, the finance minister said.

The five points that made up Jaitley’s plan to curb the current account deficit are:

1) Allowing manufacturing sector entites to avail external commercial borrowings of up to $50 million with a minimum maturity of one year. Until now, it used to be three years.

2) Removal of exposure limit of 20% of FPI’s corporate bond portfolio to a single corporate group, company and related entites and 50% of any issue of corporate bonds will be reviewed. This is in regard to FPI investment in debt.

3) For all infrastructure loans, with regard to external commercial borrowings, mandatory hedging conditions will be reviewed.

4) In FY’18-19, with regard to masala bonds (rupee-denominated overseas bonds), there will be exemption from withholding tax for issuance done in this year up to March 31, 2019.

5) There will be a removal of restriction on Indian banks market making in masala bonds including underwriting of masala bonds.

In remarks to CNBC TV18, senior finance ministry official Subhash Chandra Garg stated that he expected these measures to have an impact of anywhere between $8 billion to $10 billion.

India’s burgeoning current account deficit

Quarter CAD as % of GDP
January-March 2017 0.4
April-June 2.5
July-September 1.2
October-December 2.1
January-March 2018 1.9
April-June 2.4

Source: RBI

Not that effective?

In remarks to BloombergQuintDevendra Kumar Pant of India Ratings and Research described it as a “short-term currency booster” for the market.

He further added that the measures announced were unlikely to give to give a long-term solution to “micro-fundamentals” till factors like “structural rigidity in CAD, declining savings rate, and growth without macro-economic stability are reduced”.

HDFC Bank chief economist Abheek Buarua said that the plan’s success would “depend on the inflow of short-term debt”.  “Just opening these channels might not bring adequate dollars and maybe it will have a marginal impact,” Barua told Bloomberg. “Some of these measures could address the funding requirements in the long term and could help in stabilising the rupee, but the impact would be marginal.”

The rising trend in oil prices this year has sparked concerns about India’s ability to finance its widening CAD, triggering flight of foreign portfolio investment.

After a period of lull, the global oil market started rising early July on fears of supplies tightening due to re-imposition of nuclear sanctions on Iran from November 5. About 1 million barrels per day of oil supply has already been sucked out of the market as buyers cut supplies from the Persian Gulf country on fears of being hit by American sanctions.

Global investment research firms have expressed fear that oil prices could soar above $90 a barrel by the end of this year.