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EEFC Reforms to Reduce Rupee Volatility
On 10 May 2012, the Reserve Bank of India (RBI) issued Circular 124 detailing directives for the maintenance of the Exchange Earner's Foreign Currency (EEFC) Account Scheme. Currently, under the EEFC Account Scheme, any persons earning foreign currency from export can open an EEFC account and hold their export earnings in foreign currency without restriction. Taxand India examines the RIB's amendments and the potentially positive effect for exporters and the Rupee's value.
The RIB's amendments are an attempt to control the conversion of foreign currency in an EEFC account into Rupees. The RIB has implemented the following:
- All EEFC account holders are required to convert 50% of the balance of their EEFC account into Rupees, and credit to their Rupee account by 24 May 2012
- An EEFC account holder can only retain 50% of the future foreign exchange earnings in the account
- An EEFC account holder cannot purchase foreign exchange unless the EEFC account balance is exhausted. Instead, EEFC account holders are required to declare to the bank that the EEFC account is empty before purchasing any foreign currency
N.B. These regulations would be applicable even in the context of Resident Foreign currency Account or a Diamond Dollar Account.
The RIB's legislative amendments arrived the day after the Rupee hit a lifetime low against the US Dollar, which suggests that the new limits are a bid to shore up the value of the Rupee. The EEFC account scheme enables the exporter to save conversion costs, whilst these new limits would impact the foreign currency derivatives and hedging positions of Indian exporters, now that they are only permitted to retain 50% of earnings in foreign currency. India now needs to assess their forex policies more widely and recalibrate their treasury. The RBI could potentially boost real growth with this initiative and also, to some extent, control the Rupee-Dollar volatility.
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