The RBI says, “In order to further diversify and expand the sources of forex funding to mitigate volatility and dampen global spillover, it has been decided to undertake measures to enhance forex inflows while ensuring overall macroeconomic and financial stability.”
The central bank’s actions are in response to the Indian Rupee’s 4.1% depreciation against the US Dollar this fiscal year (as of July 5, 2022), which has been heightened by persistent geopolitical tension. Recession concerns cast a shadow over the world’s economic future. Thus, high-risk aversion has taken hold of the financial markets, resulting in spikes in volatility, selling of risky assets, and significant spillover, such as the flight to safety and increase in demand for haven assets like the US Dollar. As a result, according to the RBI, emerging market economies are dealing with a reduction in portfolio flows and ongoing pressure on their currencies.
The RBI has also announced fresh steps to increase foreign exchange inflow. Foreign currency non-resident deposits [FCNR(B) and NRE deposits] shall not be subject to the statutory liquidity ratio and cash reserve ratio maintenance requirements (SLR). For deposits mobilised up until November 4, 2022, the relaxation will be accessible. The RBI stated that transfers from non-resident (ordinary) (NRO) accounts to non-resident (NRE) accounts will not be eligible for the exemption.
New FCNR (B) and NRE deposits may be raised by banks without being subject to the present
interest rate caps. The limit for external commercial borrowings under the automatic route has been raised to $1.5 billion from $750 million or its equivalent per financial year.
The ECB framework's all-in cost cap is being lifted by 100 bps, provided the borrower has an investment-grade rating. Subject to the restrictions set forth for external commercial borrowings, banks will be able to use overseas foreign currency borrowings for lending in foreign currency to companies for a broader range of end-use purposes, according to the RBI.
Furthermore, the proposals include loosening the rules for FPI debt market involvement. According to the notification titled “Overseas foreign currency borrowing of Authorised Dealer Category-I banks”, banks can lend in foreign currency to constituents in India using the funds raised from overseas foreign currency borrowing between July 8 and October 31, 2022.
Overseas Foreign Currency Borrowing (OFCB) is currently permitted by banks up to a maximum of
USD 10 million or 100% of their Tier 1 capital, whichever is greater. Except for export finance, the borrowed funds cannot be used for lending in foreign currency. The RBI stated that the measure is anticipated to make foreign currency borrowing easier for a larger number of borrowers who may have difficulty directly accessing international markets. The central bank has issued two other notifications related to investment by Foreign Portfolio Investors (FPIs) in debt instruments.
Currently, an FPI’s short-term investments in corporate bonds and government securities (central
government securities, such as treasury bills and state development loans) should not exceed 30% of
the FPI’s overall investment. FPI investments in corporate bonds have also been given some breathing room, and they can now
purchase them for less than one year. The interest rate on the Foreign Currency (Non-resident) Accounts (Banks) Scheme and the Non-Resident (External) Rupee (NRE) Deposit had been reduced by the central bank.
The reforms include loosening restrictions on foreign institutional investors (FIIs). FPIs' ability to invest in the debt market and raising the automated routes external commercial borrowing (ECB) cap from $750 million to $1.5 billion every fiscal year.
The measures are as under:
1. Exemption from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on Incremental
FCNR(B) and NRE Term Deposits:
2. Interest Rates on FCNR(B) and NRE Deposits:
3. FPI Investment in Debt:
4. Foreign Currency Lending by Authorised Dealer Category I (AD Cat-I) Banks
5. External Commercial Borrowings (ECBs)