The Reserve Bank of India today announced various measure to increase forex inflows including temporarily permitting banks to raise fresh FCNR(B) and NRE deposits without reference to the extant regulations on interest rates. Indian rupee has hit new lows this month amid a broad rally in US dollar, which has risen to 20-year highs against a basket of major currencies. The measures announced by the RBI also included letting foreign investors invest in short-term corporate debt and allowing the purchase of more government securities under the fully accessible route.
The RBI moves came just days after the central government raised import duties on gold, apart from increasing levies on exports of petrol and diesel in an attempt to control a fast-widening current account gap.
“The global outlook is clouded by recession risks. Consequently, high risk aversion has gripped financial markets, producing surges of volatility, sell-offs of risk assets and large spillovers, including flights to safety and safe haven demand for the US dollar. As a result, emerging market economies are facing retrenchment of portfolio flows and persistent downward pressures on their currencies,” the RBI said while announcing the new measures to boost forex inflows.
Here are the measures announced by RBI:
1. Exemption from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on Incremental FCNR(B) and NRE Term Deposits
Currently, banks are required to include all Foreign Currency Non-Resident (Bank) [FCNR(B)] and Non-Resident (External) Rupee (NRE) deposit liabilities for computation of Net Demand and Time Liabilities (NDTL) for maintenance of statutory requirements such as CRR and SLR. The RBI said that from the reporting fortnight beginning July 30, 2022 incremental FCNR(B) and NRE deposits with reference base date of July 1, 2022 will be exempt from the maintenance of CRR and SLR. This relaxation will be available for deposits mobilised up to November 4, 2022. Transfers from Non-Resident (Ordinary) (NRO) accounts to NRE accounts shall not qualify for the relaxation.
2. Interest Rates on FCNR(B) and NRE Deposits
The RBI has temporarily permitted banks to raise fresh Foreign Currency Non-Resident Bank [FCNR(B)] and NRE deposits without reference to the extant regulations on interest rates, with effect from July 7, 2022. This relaxation will be available for the period up to October 31, 2022.
3. FPI Investment in Debt
Currently, all central government securities (G-Secs) with 5-year, 10-year and 30-year tenors are categorized as “specified securities” under the Fully Accessible Route (FAR). To increase the choice of G-Secs available for investment by non-resident investors under the FAR as also to augment liquidity across the sovereign yield curve, the RBI has been decided that all new issuances of G-Secs of 7-year and 14-year tenors, including the current issuances of 7.10% GS 2029 and 7.54% GS 2036, will be designated as specified securities under the FAR.
At present, FPI investment in government and corporate debt under the MTF (Medium Term Framework) is subject to a macroprudential short term limit viz., not more than 30 per cent of investments each in government securities and corporate bonds can have a residual maturity of less than one year. It has been decided that investments by FPIs in government securities and corporate debt made till October 31, 2022 will be exempted from this short term limit. These investments will not be reckoned for the short term limit till maturity or sale of such investments.
4. Foreign Currency Lending by Authorised Dealer Category I (AD Cat-I) Banks
At present, AD Cat-I banks can undertake overseas foreign currency borrowing (OFCB) up to a limit of 100 per cent of their unimpaired Tier 1 capital or US$10 million, whichever is higher. The funds so borrowed cannot be used for lending in foreign currency except for the purpose of export finance. It has now been decided that AD Cat-I banks can utilise OFCBs for lending in foreign currency to entities for a wider set of end-use purposes, subject to the negative list set out for external commercial borrowings (ECBs). The measure is expected to facilitate foreign currency borrowing by a larger set of borrowers who may find it difficult to directly access overseas markets. This dispensation for raising such borrowings is available till October 31, 2022.
5. External Commercial Borrowings (ECBs)
The RBI has now been decided to increase the limit under the automatic route from $750 million or its equivalent per financial year to $1.5 billion. The all-in cost ceiling under the ECB framework is also being raised by 100 basis points, subject to the borrower being of investment grade rating.