RESERVE BANK RAISES ADVANCE REMITTANCE CAP TO $500,000

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Importing services is set to become easier for consultancies, infrastructure and design companies. The Reserve Bank of India (RBI) has decided to further increase the cap on advance remittances toward the import of services. Banks will now be able to allow companies to make advance remittances up to $500,000 without a bank guarantee, against the previous limit of $100,000.

In case of advance remittances of over $500,000, the importer will have to furnish a guarantee from a bank of ‘international repute situated outside India’, or a bank within India. These banks will also have the responsibility of following up the transaction to ensure that the Indian company actually gets the services it has paid for, failing which, the funds will have to be sent back to India.

Services are imported mainly by consultancy, infrastructure and design companies, where specific skill-sets are required for niche services. A senior forex trader with a large foreign bank said, “The move is most probably aimed at large infrastructure or consultancy companies that have heavy import bills.” However, considering that these are few and far between, the move is likely to be aimed at niche players. “Companies that have already been importing services and have the propensity and need to import further are the ones who will benefit from the relaxation,” he added. Oil companies also import specialised services like refinery technologies. “It is a move aimed at the right direction, but the central bank’s decision to raise the cap for advance remittances is not going to have much of a policy impact as such — it basically means that a company will not need to take prior permission from the central bank to make advance payments up to the specified limit, which will cut down on some paper work and formalities,” said a treasury official from BPCL. The same holds for consultancies who need to import certain services from teams based in other countries. This is the second time that the central bank has brought about a relaxation in these norms. RBI had raised the same cap from $25,000 to $100,000 in January 2003. It had laid down the $25,000-cap in the year 2000, as a part of the foreign exchange management Act (1999).

The move can also be seen as a further step towards fuller capital account convertibility. RBI, on multiple occasions in the recent past, has stressed on the need for banks to brace up for fuller capital account convertibility.

Going forward, banks will be expected to undertake transactions in multiple currencies and act as channels for flow of funds in and out of the country, while they receive deposits, borrow from both residents and nonresidents. RBI and the Securities and Exchange Board of India (Sebi) also recently launched the currency futures market, where companies can hedge their foreign currency risks.

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