TO prevent the slide in the rupee and shore up foreign exchange reserves, the Reserve Bank of India (RBI) Wednesday announced a series of measures, including relaxation in foreign investment in debt, external commercial borrowings, and Non-Resident Indian (NRI) deposits.
With the rupee depreciating 4.1 per cent to 79.30 against the US dollar in the current financial year till July 5, FPIs (foreign portfolio investors) pulling out Rs 2.32 lakh crore in six months, and $50 billion being shaved off forex reserves over the last nine months, the measures are expected to further diversify and expand the sources of forex funding, mitigate volatility, and dampen global spillovers.
The RBI said it has been closely and continuously monitoring the liquidity conditions in the forex market and has stepped in as needed in all segments to alleviate dollar tightness with the objective of ensuring orderly market functioning. While India’s foreign exchange reserves stood at US$ 593.3 billion on June 24, 2022, the new measures are expected to boost inflows as nearly a third of India’s external debt of $ 621 billion will be due for maturity in the coming months.
In a significant move, RBI has allowed banks temporarily to raise fresh Foreign Currency Non-Resident Bank i.e., FCNR(B) and Non-Resident External (NRE) deposits without reference to the current regulations on interest rates, with effect from July 7. This relaxation too will be available till October 31, 2022.
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Currently, interest rates on FCNR(B) deposits are subject to ceilings of overnight Alternative Reference Rate (ARR) for the respective currency/ swap plus 250 basis points for deposits of 1-3 years maturity and overnight ARR plus 350 basis points for deposits of 3-5 years maturity. In the case of NRE deposits, interest rates should not be higher than those offered by the banks on comparable domestic rupee term deposits.
The central bank said investments by FPIs in government securities and corporate debt made till October 31, 2022, will be exempted from this short-term limit. These will not be reckoned for the short-term limit of one year till maturity or sale of such investments. Currently, 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.
Further, FPIs will be provided with a limited window till October 31, 2022, during which they can invest in corporate money market instruments like commercial paper and non-convertible debentures with an original maturity of up to one year. FPIs can continue to stay invested in these instruments till their maturity or sale. These investments will not be included for reckoning the short-term limit for investments in corporate securities.
It has decided to increase the limit under the automatic route for external commercial borrowing (ECB) 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, the RBI said.
In another measure, the RBI has decided that category one banks can utilise overseas foreign currency borrowing (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, it said.
Further, from July 30, 2022, incremental FCNR(B) and NRE deposits with reference base date of July 1, 2022, will be exempt from the maintenance of cash reserve ratio and statutory liquidity ratio (SLR). This relaxation, which will add to the returns of NRIs, will be available for deposits mobilised up to November 4, 2022.
Announcing the new measures, the RBI said 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 spill overs, including flights to safety and safe-haven demand for the US dollar. As a result, emerging market economies (EMEs) are facing retrenchment of portfolio flows and persistent downward pressures on their currencies, it said.
“Despite headwinds from geopolitical developments, elevated crude oil prices and tighter external financial conditions, high frequency indicators point to an ongoing recovery in several sectors,” the RBI said. Illustratively, the purchasing managers’ index (PMI) relating to services accelerated in June 2022 to its highest level since April 2011.
The central bank said the expansion of the merchandise trade deficit in June 2022 underlines the strength of domestic demand. “India’s external sector has exhibited resilience and viability on the back of robust exports of goods and services and rising remittances,” the RBI said.
The current account deficit (CAD) is modest, it said. All capital flows barring portfolio investments remain stable and an adequate level of reserves provides a buffer against external shocks, it said.
