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RECOMMENDATIONS

The fall in the rupee to record lows has raised the prospect that the government or the central

bank could take steps to support a currency seen particularly vulnerable because of a record high

current account deficit. Below are some measures the Reserve Bank of India and government could

consider to protect the rupee.

1) DOLLAR-WINDOW FOR OIL COMPANIESThe RBI could open a dollar window for oil companies to buy dollars directly from the central

bank instead of buying from markets, but it would drain foreign exchange reserves.

2) DOLLARS FOR OIL BONDSThe RBI could hold auctions to buy bonds from oil companies, providing them dollars or other

non-rupee currencies, but the outstanding amount of oil bonds is small as the government has

been giving direct cash subsidy to oil companies.

3) ASKING EXPORTERS TO BUY RUPEESThe central bank could ask exporters to convert part, or their entire, overseas foreign currency

earnings in the market immediately, providing near-term relief to the rupee.

4) CURBING NET OPEN POSITION LIMITS FOR BANKSThe central bank could ask banks to limit their net overnight open position limits, making it

difficult to short the rupee and prevent speculative trading.

5) MORAL PERSUASIONThe RBI could persuade banks and financial institutions to raise funds in dollars abroad and lend

them locally, a measure that has worked in the past when overseas rates were attractive.

6) STAGGER IMPORT PAYMENTSThe central bank could issue rules delaying or staggering import payments, which are typically

made at the end of every month, although the RBI has not taken this step in recent years.

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7) ADDITIONAL FISCAL REFORMSThe government could review sectors such as defence, or revive pension and insurance reforms,

but passage through parliament could be tough.

8) GOVERNMENT BACKED NON-RESIDENT INDIAN BONDThe government could issue a sovereign bond through State Bank of India to non-resident

Indians, but such a move could increase external debt and interest liability.

9) SOVEREIGN OVERSEAS BONDThe government could issue sovereign bonds to raise dollars from overseas investors, but the

RBI is reluctant to expose the country to foreign exchange risks during repayment.

Conclusion

Investments made in Indian real estate sector are cumulatively estimated to be around $15 billion

since foreign direct investments were allowed in the sector. Around 20 per cent of this was

expected to get an exit in the past two years, but seems a distinct possibility now. Private equity

firms with offshore funds are in a state of flux not only because of their stuck investments and

delay in project completions, but are also concerned about not being able to raise fresh funds in

the current scenario. Most real estate funds that have invested at dollar rate of around Rs 40-45

are likely to get an exit after these seven years at more than Rs 60, which is a loss of around 30

per cent in the currency itself. Moreover, most assets, given the weak property market, have not

seen any major appreciation. Private equity investment in Indian real estate nose-dived in the

first half of 2013. For the first six months this year, real estate private equity investments were

recorded at $276 million (Rs 1,638 crore), 46 per cent lower than a year ago. Private equity funds

invested $514 million (Rs 3,050 crore) in the first half of 2012. Private equity deals, given their

structure and longer tenure, are not covered through any hedges and this leaves room for sharp

impact of currency risk on exits. In the past five years, currency has depreciated by 3-4 per cent

compounded annually depending on tenure of the fund. There will be cases where funds will put

exits on hold and wait for rupee to appreciate for better returns.