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Sep 18, 2018, 14:24
Finance ministry takes on the widening CAD. Intends to curb it using these five measures
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On 14 September, Indian Government announced that it will focus on five points to control the current account deficit of India. Finance minister Arun Jaitley announced that the government is taking measures to reduce the “non-necessary” imports.

 

These steps were taken to stabilize the condition of rupee. Rupee has become the worst performing Asian currency this year. The major reasons for the depreciation of rupee were increasing crude oil prices, trade war between US-China. Rupee has fallen by almost 11% in 2018.

 

Finance Minister stated these five steps to stabilize rupee and the current account deficit

 

Review of Mandatory hedging conditions for infrastructure loan.

The hedging cost was 4%-4.5%, even for the companies with good rating the cost of borrowing went upto 9%. This move will help the companies to raise dollar loans easily.

 

To allow manufacturing sector entities to use external commercial borrowings, this will be up to $50 million. The minimum maturity period has also been reduced to one year as compared to the previous period of three years.

Three year maturity period used to increase the borrowing cost; this led to loss on interest for the companies. Due to this move companies can raise funds for a short period of one year which will help them to reduce the borrowing cost.

 

Removing exposure limits of 20% of Foreign Portfolio investor (FPI) corporate bond to a solitary corporate group, company and associated entities. Also, review of 50% of any issue of corporate bonds.

 

Withholding tax will be exempted for issuance of Masala bonds issued in FY19. Masala Bonds are the bonds which are issued outside but they are denominated in Indian currency rather than the local currency.

Exemption of Tax for the issuance of Masala bonds will encourage more foreign investors to invest in Masala bonds. Due to the exemption of tax the issuer of Masala Bonds can also more returns.

 

The restrictions on the Indian Bank market making in Masala Bonds with underwriting of Masala Bonds have also been removed.

Earlier companies has to get in touch with foreign underwriters for the issuance of Masala bonds but now due to the removal of restrictions on the Indian Bank, they can easily contact Indian banks for the underwriting of Masala Bonds.

 

Finance Minister Arun Jaitley also mentioned that a presentation was made by Urjit patel, the governor of RBI on global economy and the impact of external factors on the Indian economy. As per the presentation, India’s growth rate is better than other economies of the world and also the inflation rate of India is within a moderate range.

 

Rupee weak performance against dollar and higher oil prices has also led to increase in the fuel prices in India which led to a nationwide protest against the Government in many parts of India. But according to the India’s Economic Secretary no measures regarding oil prices were discussed at the meeting.

 

Arun Jaitley also said that the area that needs special attention is the increasing CAD which touched 2.4% of GDP in the June quarter. He also stated the government will take necessary steps to reduce non essential imports and encourage export. India’s increasing trade deficit stood $17.4 billion in August.

 

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