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Dear All Greetings from R & A

While the rains have brought relief from the scorching summer, the declining trend in the rupee for past two months is bound to pose a threat to the growth of overall economy.

Strengthening of dollar index, strong importers demand, continuous capital outflows coupled with widening current account deficit has put pressure on the rupee.

The Finance Ministry, however, believes that the ‘unwarranted panic’ in the market will settle down in some time. Chief economic adviser RaghuramRajan, too, is of the opinion that weakness in rupee could be a temporary phenomenon.

Whether the currency would find its stable level or will continue to slide further remains a tricky question. But till the currency settles itself, let’s have a look at how continuous depreciation of the Indian currency will affect the common man.

A weak rupee will increase the burden of Oil Marketing Companies (OMC’s) and this will surely be passed on to the consumers as the companies are allowed to do so following deregulation of petrol and partial deregulation of diesel. If the OMCs increase fuel prices, there will be a substantial increase in overall cost of transportation which will stoke up inflation.

If the depreciation in rupee continues, it will further increase inflation. In such a situation RBI will have very less room to cut policy rates. No cut in policy rate will add to the borrower’s woes who are eagerly waiting to get rid of the high loan regime.

Students who are studying abroad will bear the brunt most owing to depreciating rupee. Expenses incurred towards the university/college fee as well as that of living will shoot up, thereby spelling a huge burden on the students.

The depreciating rupee will surely be a dampener if you are planning your holiday abroad. Your travel charges as well as hotel charges will escalate drastically, let alone shopping and other miscellaneous spending activity.

A frail rupee will add fuel to the rising import bill of the country and thereby increasing its current account deficit (CAD) and this will further slow- down the growth of the economy.

RBI is finding solutions as to how to arrest the rupee downslide,the Government of India is making all attempts to accelerate the economic reforms. In this direction the Government had in March 2013 constituted a four member committee chaired by Mr ArvindMayaram (AM Committee).

The AMCommittee submitted its recommendations in June 2013 and suggested several reform measures which include

  1. further opening up of more than 20 sectors for foreign investment, including sectors such as telecom, defence and insurance;

  2. fundamental changes in the way foreign investment is looked at by investors;

  3. categorisation of activities based on which foreign investment should be allowed.

Based on the recommendations of the AM Committee, the following decisions were taken at the meeting of the key ministers chaired by the Prime Minister on 16 July 2013:

  • Asset Reconstruction Companies:Increase the foreign investment limit in asset reconstruction companies from the present 74% upto 100%. However, any foreign investment above 49% would require prior Government approval;

  • Single Brand Retail Trading: Presentlyupto 100% FDI is permitted in single brand retail trading subject to prior Government approval. It has been decided to bring the first 49% FDI under automatic route. FDI above 49% will continue to require Government approval;

  • Petroleum and Natural Gas Refining: FDI in the petroleum and natural gas refining sector by public sector undertakings has been approved upto 49% under the automatic route. Prior Government approval is required Under the extant policy;

  • Telecom: increase in the foreign direct investment (FDI) limit in the telecom services sector (basic and cellular services, etc) from the present 74% upto 100%. However, the extant condition of seeking Government approval for FDI above 49% will continue;

  • Commodity Exchanges, Power Exchanges, Stock Exchanges etc.: Foreign investment in commodities exchanges, power exchanges and other infrastructure companies in the securities market (i.e. stock exchanges, depositories and clearing corporations) has been approved upto 49% under the automatic route. Under the extant policy, FDI in this sector requires prior Government approval;

  • Courier services: 100% FDI approved under the automatic route. Under the extant policy, this required prior Government approval;

  • Credit Information Companies: Foreign investment in credit information companies has been increased from 49% to 74% under the automatic route.

  • Defence:The Cabinet Committee on Security to approve proposals from foreign investors for investment beyond 26% on a case to case basis.

  • Insurance: The press release issued by Government is silent on any change in the foreign investment limits for insurance sector. However, we note from a press meeting conducted by the Commerce Minister, Mr Anand Sharma that foreign investment in the insurance sector has been approved to be increase from 26% to 49%. It is noteworthy that any increase in the foreign investment in the insurance sector would also require an amendment of the Insurance Act, 1938 which is currently pending before the RajyaSabha (Upper House of the Parliament) for its approval and is expected to be discussed during the upcoming monsoon session of the Parliament.

Some of the other important recommendations of the AMCommittee which do not find reference in the press release of the Government of Indian issues on 16 July 2013 are as follows:

  • The AM Committee had proposed a composite cap of 49% and 74%, respectively (including FDI and FII investments) for the defence and multi-brand retail sectors;

  • Increasing the foreign investment limit from 26% to 49% in sectors such as print and television media (news) and FM Radio; and

  • Increasing the FDI cap to 100% in infrastructure activities like telecommunications, broadcasting carriage services, facsimile editions of foreign newspapers, Internet service providers, existing airport projects and non-scheduled air transport services.

We understand that the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India (DIPP) will need to issue detailed press notes to formally give effect to these decisions. While the decision to further liberalise the various sectors is highly appreciated, one will have to wait for the actual press notes to be issued by DIPP and hope that it will have a positive impact and thereby strengthen the Rupees against the Dollar.

With kind regards Rashida
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