Why the govt tried to stem forex remittances by Indians

Last Wednesday’s crackdown on foreign exchange remittances by Indian individuals and companies appears to have been triggered by the government’s assessment that several entities in the foreign exchange market had planned large-scale transfers of the dollar through official channels, to take advantage of an arbitrage opportunity.

Officials involved with the management of forex inflows and outflows believe that an attractive arbitrage opportunity arose with the rupee having already weakened by about 13 per cent against the dollar since end-March this year and expected to drop further in the days to come.

Remitting the dollar abroad now at the current rate and then bringing it back after further depreciation of the Indian currency would have given such traders a tidy profit margin through arbitrage.

According to these officials, several emails outlining such plans were intercepted, triggering the rollback of some of the relaxations that the Reserve Bank of India had introduced in the remittances scheme in 2007.

Thus, individuals could remit only up to $75,000 in a financial year and Indian companies could use only foreign exchange equivalent to only 100 per cent of their net worth in a year for investment abroad.

In 2007, RBI had relaxed the annual remittance caps by allowing individuals to remit up to $200,000 and Indian companies could use forex equivalent to 400 per cent of their net worth for investment abroad. This was done to counter the impact of the heavy dollar inflows that year. The last few months have seen a rise in dollar outflows and, therefore, the relaxations introduced in remittance rules in 2007 were rolled back.

Last year, Indian individuals remitted about $1.3 billion abroad while Indian companies used about $7 billion to invest abroad. The outflow in the first four months of the current financial years under these heads has slowed down. But fears of a spike in such outflows, encouraged by the arbitrage opportunity, led to the imposition of the new caps on such remittances.