RBI taking steps to ensure India’s financial stability

Question: India’s foreign exchange reserves have continued to remain at comfortable levels. Does this provide enough security considering the geo-political situation prevailing today?

ANSWER: The Reserve Bank of India is taking all precautions to ensure that economic and financial stability is not compromised in case any economic sanctions are imposed by any country. A group constituted by the central bank has suggested the internationalisation of the rupee whereby dependence on the US dollar and euro are reduced. Strong foreign exchange reserves would help to manage trade and business requirements but would not be sufficient defence against economic sanctions. It is therefore proposed to take measures for conducting trade in rupees through bilateral and multilateral trade agreements with partner countries. Payment and settlement mechanisms are proposed to be set up using the Asian Clearing Union in order to promote the rupee as a settlement currency. The government is also considering allowing foreigners to have rupee overseas accounts. Further, efforts would be made to include the rupee as part of the International Monetary Fund’s special drawing rights (SDRs). To incentivise investments by foreigners, the withholding tax on interest paid on rupee denominated ‘Masala Bonds’ is likely to be waived. The use of the Unified Payment Interface (UPI) is to be increased for cross border payments. All these measures are proposed to be introduced on the basis that the use of the rupee would add to the bargaining power of India and make the country less vulnerable to external shocks.

Question: NIFTY contracts are traded on the National Stock Exchange. I believe that from this month (July) the contracts will also be traded on the GIFT NIFTY. What is the difference between the two?

ANSWER: NIFTY contracts traded on the National Stock Exchange (NSE) are denominated in rupees while those on the GIFT NIFTY are denominated in US dollars. Indian contracts are traded from 9am to 4pm while contracts on GIFT NIFTY are traded from 6.30am to 3.40pm and then again from 4.35pm to 2.45am (all India time). Therefore, the early session makes these contracts a good indicator for investors to take a call on the NIFTY before trading starts on the NSE. Since the GIFT City is a special economic zone, all trades are exempt from the securities transaction tax and the commodities transaction tax. It may be pointed out that prior to July 3, the derivative contracts on the NIFTY Index were traded on the Singapore Exchange (SGX). This shift to GIFT City has been done under an arrangement between NSE and SGX.

H. P. Ranina is a practising lawyer, specialising in tax and exchange management laws of India.