Last week, the RBI announced additional measures to halt the steep fall in the rupee which now trades at below 60 to the US dollar. The central bank imposed restrictions on the amount individuals and businesses can remit or invest overseas. Now, as an individual, you can remit overseas a maximum of $75,000 (or equivalent) in a year. Earlier, you could remit $200,000 a year. Also now, you are not allowed to invest in immovable property.

So, say goodbye to plans of buying a house in Singapore or Dubai. The RBI has also reduced the amount Indian companies can invest abroad. From four times its net worth, an Indian company can now invest only up to an amount equal to its net worth, under the automatic route.

These measures are aimed at stemming foreign currency outflows from the country and shoring up the rupee. But market observers are terming these moves as ‘a return to capital control’. What does this mean?

Current and Capital

Transactions using foreign currency fall under two categories -current account and capital account.

Capital account transactions involve changes in assets or liabilities abroad. For instance, when an Indian buys a business or property in a foreign country, it is considered a capital account transaction. Likewise, when a foreign company buys stake in an Indian company, the transaction is capital in nature. Current account transactions on the other hand are all those transactions which are not capital in nature. So, payment for imports, interest payment on loans, gifts, expenditure on travel, education and medical treatment abroad come under the current account.

When a country makes its currency convertible, it allows its residents the freedom to convert the home currency into an internationally accepted currency such as the dollar and vice versa.

In India, there is full convertibility for current account transactions. Most current account transactions are permitted except for a few prohibited ones. There may be limits though, beyond which approval from the RBI is required.

But on the capital account, the rupee is only partially convertible. Purchase or sale of foreign exchange on the capital account is permitted only for those transactions that have been specifically mentioned under the rules.

Beginning the early 1990s, as part of the liberalisation process, India began easing restrictions on, the till then tightly controlled capital account transactions. Over the years, there was a gradual relaxation on the amount of foreign exchange Indians could remit or invest abroad. In 2004, the RBI introduced the Liberalized Remittance Scheme. Under this, $25,000 could be remitted abroad by Indian individuals (without RBI approval).

This was later increased to $75,000 , and by end 2007, the limit was increased to $200,000 This amount can be used for both capital and current account transactions. Indians were also allowed to invest in property abroad.

To enable Indian companies to acquire assets abroad, the RBI in 2007 increased the foreign currency investment limit to up to four times their net worth , under the automatic route (without RBI approval). Investments by companies above this limit required RBI approval.

A step back

Now, with the RBI in rupee salvage mode, there has been a reversal in the liberalisation moves. In a bid to conserve dollars, the central bank has reduced the amount individuals and companies can remit or invest abroad without prior approval. Property purchases in foreign countries have also been disallowed.

The new reduced investment limit for companies (one time of net worth) will however not apply to Navratna public sector companies, ONGC Videsh and Oil India for their overseas investments in the oil sector. This is to ensure that the country’s attempts at securing its energy supplies are not hampered.

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