Time was when one had to queue up before the Reserve Bank of India or move the high and mighty to get foreign exchange sanctioned for the most legitimate of human needs, such as medical treatment and higher studies. This week’s liberalisation of foreign exchange rules for individuals announced by the RBI shows how far one has come from the days when the craze for phoren was the leitmotif of urban banter. Individuals can now remit up to $ 200,000 every year, twice the current limit, without the RBI’s permission. This could, as we said symbolically, help a middle-class Indian buy a villa overseas. Mutual funds from India can invest up to $ 5 billion a year, up from the earlier $ 4 billion. Corporates also now have an easier regime in taking money out of India.
The rupee has gained more than 10 per cent against the US dollar since the beginning of the year. Though policy-makers point out that the rupee is stable against other currencies such as the euro, in effect, there is no running away from the problem of plenty on the foreign exchange front. With foreign exchange reserves touching $ 232 billion at the last count, and increasingly strong signals that India is now a haven for portfolio investors and foreign direct investment (FDI), policy-makers obviously have much more elbow room to liberalise the outgo of foreign exchange, which over the past decade has turned from being a vice to nearly a virtue. This is a clear gain from economic globalisation, though there is much to be said about how a strong currency can potentially erode India’s export competitiveness.
If the RBI is to intervene to stabilise the rupee by buying dollars in the market, that could inject more cash into the monetary system and potentially raise inflation. Only a few days ago, the US Federal Reserve slashed its key interest rate, raising prospects of a matching cut in India which again raised fears of money-stoked inflation. The RBI’s largesse is thus part of a tightrope walk, much as it bestows the gains of globalisation on your friendly neighbourhood phoren-lover.