The government has no plans to regulate participatory notes, Finance Minister P Chidambaram said on Wednesday, adding, there is no review at the moment on the $25-billion limit for Market Stabilisation Scheme (MSS) bonds. “We will review it if it's necessary,” he said. A number of hedge funds invest in Indian equities through participatory notes, which allow them to invest without registering with the Securities and Exchange Board of India.
The finance minister's comments come a day after the government barred companies from repatriating more than $20 million of funds borrowed overseas, to stem capital flows that pushed the local currency to a nine-year high.
“One of the purposes is to moderate the inflow of capital. The claim that curbs will hurt investments is exaggerated,” Chidambaram said.
The RBI has bought billions of dollars to rein in the rupee, which, powered by foreign investment inflows, has risen about 10 per cent against the dollar this year, causing policy headaches.
The intervention releases rupees into the local money market, which adds to inflationary pressures. To remove, or sterilise, the cash, the RBI in March resumed sales of MSS bonds.
At a July 31 policy review, the RBI increased reserve requirements for banks, a step, which it expects to remove $4 billion from the money market, and on Tuesday the government announced restrictions on foreign borrowing by local firms.
With the RBI wanting to contain inflation but also expected to avoid raising interest rates if it can — higher rates would attract more foreign capital — the market expects the MSS limit to be increased. It was last raised in April.
“I think they will do it. The way things are going, it looks like (the RBI) is determined to suck out excess liquidity from the system," a senior dealer at a private sector bank said.
The Indian economy grew by 9.4 percent in the 2006/07 fiscal year to March 31, its fastest pace in 18 years, but the growth was accompanied by a surge in prices.
Annual inflation hit a two-year high of 6.7 per cent in late January, but has been below 5 per cent since June.
The RBI raised interest rates five times in 2006/07, but has not raised them since late March.