To boost the rupee and attract foreign investment in the country, the Reserve Bank of India (RBI) on Wednesday announced a number of measures. These include increased FCNR (B) and relaxation of cash reserve ratio (CRR) and statutory liquidity ratio (SLR) on NRE term deposits, simplification of rules for FPIs and raising limits on external debt, among others.
The rupee has been depreciating over the past few months and has hit all-time lows several times. On Tuesday, it hit a record low of 79.38 against the dollar. The local currency was at 73.77 against the dollar on January 12, 2022 and since then it has fallen more than 5 rupees and reached 79.16 on Tuesday. Foreign portfolio investors (FPIs) also withdrew about Rs 2.2 lakh crore from domestic equities in the first six months of 2022, the highest ever net withdrawal from them.
The Reserve Bank said on Wednesday that the Reserve Bank of India (RBI) has been closely monitoring the liquidity situation in the foreign exchange market and has taken necessary steps in all its departments to reduce the tightness of the dollar in order to ensure smooth functioning of the market.
To further diversify and expand the sources of forex funding to reduce volatility and reduce global volatility, the RBI has decided to take some measures. Are:
Exemption from CRR, SLR on incremental FCNR (B) and NRE term deposits
The RBI has decided that from the fortnight of the report starting July 30, incremental FCNR (B) and NRE deposits with reference reference date of July 1, 2022 will be exempted from the supervision of CRR and SLR. This discount will be available for deposits made till November 4, 2022. Transfers from non-resident (NRO) accounts to NRE accounts will not be eligible for this discount.
Currently, banks are required to include all foreign currency non-residents (banks). [FCNR(B)] And Non-Resident (External) Rupee (NRE) Deposit Liabilities for calculation of Net Demand and Time Liabilities (NDTL) for maintenance of CRR and SLR.
Interest rates on FCNR (B) and NRE deposits
The RBI has now temporarily allowed banks to increase FCNR (B) and NRE deposits on a temporary basis without reference to the existing rules on interest rates applicable from July 7, 2022. This discount will be available for the period up to 31st October 2022.
“Currently, interest rates on non-resident foreign currency banks [FCNR(B)] Deposits are subject to a maximum of the Overnight Alternative Reference Rate (ARR) for the respective currency / swap and 250 basis points overnight ARR plus 350 base points for deposits of 1 year to 3 years and 3 years and above. Up to 5 years maturity. In the case of NRE deposits, as per the current guidelines, interest rates on term deposits in domestic rupee should not be higher than the interest rates offered by banks, ”the RBI said.
Simplifying the rules of FPI investment in debt
Relaxing existing rules on FPI investments in loans, the RBI said all new issues of 7-year and 14-year term government securities would be eligible for Fully Accessible Route (FAR). Unlike other securities, there is no limit to FPI investment in bonds designated under FAR.
The RBI relaxed the residual maturity rules for FPI investments in government and corporate debt. Investments made by FPIs in such bonds till October 31, 2022 are exempted from the short-term limit, according to which the maturity of more than 30 per cent of the investment cannot be less than one year. The central bank has also given a window for FPIs to purchase money market instruments like commercial documents with original maturity for one year till October 31.
Foreign Currency Loans by Authorized Dealer Category I (AD Cat-I) Banks
Currently, AD Cat-I banks can borrow up to 100 per cent of their weak Tier 1 capital or $ 10 million, whichever is higher. The funds thus borrowed cannot be used to lend in foreign currency without the purpose of export financing.
The RBI has now decided that AD Cat-I banks can use OFCBs to lend to institutions in foreign currency for a wide set of end-use purposes, subject to a negative listing set for external business loans (ECBs). “This measure is expected to make it easier to borrow foreign currency from large borrowers who may find it difficult to enter foreign markets directly. The provision for raising such loans is available till October 31, 2022, ”the central bank said.
Increasing the limit on external business loans
Under the automated ECB route, eligible borrowers are allowed to raise funds through their AD banks without going to the RBI, as long as the borrowing complies with prudent parameters such as the ECB framework’s all-in-spending limit, minimum maturity requirement. And the overall dynamic ceiling.
“It has been decided to increase the limit on automated routes from US $ 750 million or its equivalent per fiscal year to US $ 1.5 billion. The maximum spending ceiling under the ECB framework is also being increased by 100 basis points, subject to borrower investment-grade rating, ”the RBI said.
“The global outlook is clouded by the risks of a recession. As a result, high-risk hatred has taken over financial markets, creating a wave of instability, shutting down the sale of risky assets, and demanding flights for safety and safe haven for the US dollar. As a result, emerging market economies (EMEs) are facing reduced portfolio flows and constant downward pressure on their currencies, ”the RBI said.
Jyoti Prakash Gadiya, Managing Director, Regent India, said, “The RBI has come up with the liberalization of foreign exchange flows. It is a bilateral strategy by which the central bank has sought to hamper the flight of FPIs on the one hand and bring in more dollars with attractive interest rates on the other. Apparently, the RBI is trying to make up for any shortcomings in meeting short-term foreign exchange commitments. ”
Gadiya further said that short-term strategic measures to improve foreign exchange liquidity may not be enough to attract funding, especially at the ECB front. So even for such a short-term layout, a broader approach could have been better.
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