In order to bolster the rupee and attract foreign investments into the country, the Reserve Bank of India (RBI) on Wednesday announced a slew of measures. These include relaxations on cash reserve ratio (CRR) and statutory liquidity ratio (SLR) on incremental FCNR(B) and NRE term deposits, easing rules for FPIs, and raising limits on external borrowings, among others.
The rupee has been witnessing the downward trend for the past few months and has touched its all-time lows multiple times. It hit its record low of 79.38 to a dollar on Tuesday. The local currency had stood at 73.77 to a dollar on January 12, 2022, and since then it has fallen by a significant more than Rs 5 and touched 79.16 on Tuesday. Foreign portfolio investors (FPIs) have also pulled out around Rs 2.2 lakh crore from domestic equities in the first six months of 2022, the highest-ever net withdrawal by them.
“The Reserve Bank has been closely and continuously monitoring the liquidity conditions in the forex market and has stepped in as needed in all its segments to alleviate dollar tightness with the objective of ensuring orderly market functioning,” the central bank said on Wednesday.
To further diversify and expand the sources of forex funding for mitigating volatility and dampening global spillovers, the RBI has decided to undertake few measures. There are:
Exemption from CRR, SLR on Incremental FCNR(B) and NRE Term Deposits
The RBI has decided that with effect from the reporting fortnight beginning July 30, incremental FCNR(B) and NRE deposits with a 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.
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 CRR and SLR.
Interest Rates on FCNR(B) and NRE Deposits
The RBI has now temporarily permitted banks to raise fresh 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.
“At present, interest rates on Foreign Currency Non-Resident Bank [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 year to less than 3 years maturity and overnight ARR plus 350 basis points for deposits of 3 years and above and up to 5 years maturity. In case of NRE deposits, as per extant instructions, interest rates shall not be higher than those offered by the banks on comparable domestic rupee term deposits,” the RBI said.
Easing Rules on FPI Investment in Debt
Relaxing the existing norms on FPI investment in debt, the RBI said all new issuances of government securities of 7-year and 14-year maturity would be made eligible for the fully accessible route (FAR). Unlike other securities, FPI investment in bonds that are designated under the FAR does not have any limits.
RBI also relaxed norms on residual maturity for FPI investments in government and corporate debt. Investments by FPIs in such bonds made till October 31, 2022, are exempt from a short-term limit, according to which not more than 30 per cent of investments can have a residual maturity of less than one year. The central bank also provided a window till October 31 for FPIs to buy money market instruments such as commercial papers with an original maturity of up to one year.
Foreign Currency Lending by Authorised Dealer Category I (AD Cat-I) Banks
Currently, 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 $10 million, whichever is higher. The funds so borrowed cannot be used for lending in foreign currency except for the purpose of export finance.
The RBI has now decided that AD Cat-I banks can utilise OFCBs for lending in foreign currency to entities for a wider set of end-use purposes, subject to the negative list set out for external commercial borrowings (ECBs). “The measure is expected to facilitate foreign currency borrowing by a larger set of borrowers who may find it difficult to directly access overseas markets. This dispensation for raising such borrowings is available till October 31, 2022,” the central bank said.
Raising Limit on External Commercial Borrowings
Under the automatic ECB route, eligible borrowers are allowed to raise funds through their AD banks, without approaching the RBI, as long as the borrowing is in conformity with the prudential parameters of the ECB framework such as all-in cost ceiling, minimum maturity requirements and the overall dynamic ceiling.
“It has now been decided to increase the limit under the automatic route from US$ 750 million or its equivalent per financial year to US$ 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.
“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 (EMEs) are facing retrenchment of portfolio flows and persistent downward pressures on their currencies,” the RBI said.
Jyoti Prakash Gadia, managing director of Resurgent India, said, “The RBI has come with the liberalization of forex flows. It’s a two-pronged strategy whereby the central bank has attempted to cause impediments to the flight of FPI on one hand and bring in more dollars with attractive interest rates on the other. Apparently, the RBI is trying to cover any possible shortfall in meeting forex commitments in a short term.”
Gadia added that a short-term policy measure for improving forex liquidity may not be adequate to attract funds, particularly on the ECB front. Hence, a broader perspective could have been better even for such a short-term arrangement.
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