Problems relating to Trade and Investment on India
12. Exchange controls |
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Issue |
Issue details |
Requests |
Reference |
| (1) Restrictions in Foreign Exchange Transactions within a Single Group of Companies | - Our member firm desires to establish at some future time an institution that consolidates foreign exchange transactions among the group companies in India. However, RBI allows foreign exchange transactions only with banks, disallowing such transactions within a single group of companies. | - It is requested that GOI further deregulates foreign exchange restrictions. | - RBI Regulations |
| (2) Complex Exchange Transactions Based on Real Demand Principle | - RBI compels the principle of actual demands, requiring a heavy burden of preparation and submission of related evidential documents. | - It is requested that GOI further deregulates foreign exchange restrictions. | - RBI Regulations |
| (Action) - GOI stringently controls foreign exchange transactions between residents and non-resident under the real demand principle. Only domestic banks are authorised to intervene in non-resident's rupee transactions, provided, however, that FRB authorisation upon the domestic bank's transactions with a non-resident is strictly restricted only to spot trading sale in rupees based upon real demand. Banks execute confirmation of the evidence of real demand prior to transactions. |
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| (3) Restricted Holding of Foreign Currency | - Due to the restricted foreign currency holding, a Member Firm's Subsidiary (MFS) is compelled to convert foreign currency received from customers within 1-month of the receipt of remittance. Fund procurement from overseas is subject to conversion into rupee, devoid of merit from the interest gain, because of the hedge against foreign exchange fluctuations. Due to deregulation, holding foreign currency in a bank account has been made possible in exchange for evidence that shows the payment plan in foreign currency, provided, however, that such bank deposit is not interest bearing. |
- It is requested that GOI materialises Interest bearing foreign currency ownership. | - Foreign Exchange Act |
| (4) Settlement of Account in Rupee is difficult | - In the growing Indian market, import to India is rapidly growing up from Japan and other manufacturing footholds in Asian countries. However, RBI permits only U.S. $ as settlement currency which is susceptible of exchange risks. While a Japanese enterprise desires to settle the account in rupees to minimise the foreign exchange risk to its sales subsidiary in India, it is difficult to settle the cost of imports in rupee. | - It is requested that RBI: -- deregulates or repeals the foreign exchange control, and -- approves payment in rupees for international settlement. |
- RBI Regulations |
| (Improvement) - Since 25 June 2012, repayment by external commercial borrowing (ECB) has become available against the domestic borrowing in Rupee to fund the equipment by manufacturing and infrastructure related enterprises, provided, however, that among other things, such enterprises must show the continuous foreign currency revenue in the 3-consecutive-accounting-years, and the amount of repayment is allowed only up to 50% of the annual average export amount in the past 3-consecutive-accounting-years. - It is under the strictly rigid real demand principle that non-residents' export/import transactions are made possible. |
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| (5) Inefficiency of Domestic Settlement in Rupee | - Payment by cheque is the main stream of the domestic settlement of account in rupee, which takes a long time before the settlement is completed in the vast India. | - Early proliferation of electronic payment is eagerly awaited. | |
| (6) Restricted Settlement in Foreign Currency for the Domestic Transactions | - Indian Rupee is the only authorised means of payment in settlement of account in the domestic transactions. Indian Rupee, not being hard currency, heavily cripples foreign funded enterprises' freedom in advancing transactions on dealer's terms from the perspective of the exchange risks. | - It is requested that GOI enables settlement in foreign currency in the Indian domestic transactions as well. | - Foreign Exchange Regulation Act |
| (7) Difficulties in Pass on the Increased Import Price to the Costs of Materials, Parts and Components due to Weaker Rupee | - Due to depreciation of Rupee, the costs of import materials and parts have sharply gone up. Such increased cost cannot be passed on to the price of the final products and materially affects the MFS operation. | ||
| (8) Radical Fluctuations in Exchange | - As it stands, Member Firm's Subsidiary (MFS) benefits from exchange gain on a direct export transaction in yen. Nevertheless, negotiation for passing the raise to theprice is difficult. In a transaction between related parties, the prevailing Yen depreciation enables MFS to offer special prices to its customers. However, MFS runs on a thin margin, so that if the exchange rate swings toward appreciation of Yen, it will instantly show operational loss: such is the severity of the fluctuation band. | - It is requested that GOI will use its best efforts to maintain stability in foreign exchange, by holding the fluctuation band within the swing of a few percents in a 6-months period. | |
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