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What Does PM's Five Point Action Plan Mean for the Indian Economy?

Professor of Financial Economics and Part-time Value Investor, Transfin.
Sep 20, 2018 5:55 AM 3 min read
Editorial

On Friday, 14th September, PM Modi met with Finance Minister Arun Jaitley, RBI Governor Urjit Patel and several top policy-makers to take heed of the multifarious headwinds facing the Indian economy, the effects of which is being evidenced by the sliding INR. What came out of it was an incremental 'five-point economic action plan'. While these incremental measures came in somewhat short of market expectations, additional measures with heightened granularity are expected to be announced in the coming days. Here is a brief overview of the five-point plan.

 

Mandatory hedging conditions for infrastructure loans to be eased allowing companies greater flexibility in raising dollar-denominated loans.

Under the current set-up, Indian borrowers tapping foreign currency loans advanced by non-resident lenders are required to cover the principal + coupon (interest payments) through financial hedges. These hedges results in an uptick in the borrowing costs for even well-rated companies notwithstanding natural hedges (via dollar-denominated exports) in place for several of them anyway. As per the announcement, these hedging requirements are expected to ease, allowing companies to raise dollar-denominated loans with greater flexibility.

 

[Listen in from 8:30 onwards to learn more on the Five Point Action Plan] 

 

Allow manufacturing companies to avail foreign-currency denominated loans up to $50 million with a maturity of one year (down from three years) generally leading to lowering interest expenses and heightened flexibility in overseas funding.

 Like most bonds (loans), shorter duration should lower hedging costs and somewhat lower interest rates. Consequently, this should bode well for manufacturing companies in de-risking subsequent interest bearing capital raises. This should also boost the ability to refinance loans to gain interest rate benefits while also improving the overall flexibility in overseas funding.    

 

Removal of 20% exposure limit of FPI's corporate bond portfolio to a single corporate group, and 50% of any issue of corporate bonds will be reviewed aimed to drive more FPI traction.

As it stands, investments by an FPI is not allowed to exceed 50% of a corporate bond issue. Also, FPIs are not expected to have more than 20% exposure of its corporate bond portfolio to a single company. The announced measures aim at loosening these impeding restrictions and such are expected to drive more FPI traction.

 

Exemption from withholding tax for masala bond issuance for the current fiscal year designed to attract overseas investors.  

This is the 5% tax that Indian companies pay on the interest payable to foreign companies but is typically financially engineered into the coupon rate and passed on to investors. In that context, removing withholding tax of 5% on interest rates should bode well for overseas investors. The issuer should also be able to offer better returns to investors in effect making such bond offerings more competitive in the global marketplace.  

 

Removal of restriction on Indian banks market making in Masala bonds including underwriting of Masala bonds to widen the instruments scope and breadth.

Indian companies can now go to foreign branches of Indian banks to manage Masala bond issuance (Rupee-denominated bonds issued overseas). Earlier, they had to rely on foreign stock exchanges and foreign underwriters. This was a meaningful obstacle for many companies who did not have that level of resources or reach.

 

All these measures are directly aimed at increasing dollar inflow in an attempt to support the Indian Rupee. There were generic comments made on trimming down "non-essential" imports without actually identifying what qualifies as essential and what qualifies as non-essential. However, one can expect more detailed measures in coming days as the INR appears to maintain its slide.

 

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