RBI liberalises with several measures to improve the forex in-flow

RBI today announced several measures in order to enhance forex inflows to the country while ensuring overall macroeconomic and financial stability.

“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 notification said.

The highlight of measures undertaken by RBI today:

1. Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR): With effect from July 30, 2022, 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, RBI said. However, transfers from Non-Resident (Ordinary) (NRO) accounts to NRE accounts shall not qualify for the relaxation, the circular said.
2. Interest Rates on FCNR (B) and NRE Deposits:  RBI has 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, RBI said. Currently, interest rates on Foreign 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. For FCNR (B) deposits of 3 years up to 5 years interest ceiling is overnight ARR plus 350 basis points. In the 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.
3. FPI Investment in Debt (specified securities): Foreign Portfolio Investors (FPIs) are presently investing in government securities and corporate bonds through three channels: (a) the Medium-Term Framework (MTF) introduced in October 2015; (b) the Voluntary Retention Route (VRR) introduced in March 2019; and (c) the Fully Accessible Route (FAR) introduced in April 2020. In order to encourage foreign portfolio investment, by non-resident investors, it 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 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. RBI now 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,” it said.
4. Foreign Currency Lending by Authorised Dealer Category I (AD Cat-I) Banks: At present, AD Cat-I banks are allowed to undertake overseas foreign currency borrowing (OFCB) up to a limit of 100 per cent of their unimpaired Tier 1 capital or US$10 million, whichever is higher. The funds so borrowed cannot be used for lending in foreign currency except for the purpose of export finance. RBI relaxed this condition and permitted AD Cat-I banks to utilise OFCBs for lending in foreign currency to entities for a wider set of end-use purposes, subject to the negative list set out for external commercial borrowings (ECBs). “The measure is expected to facilitate foreign currency borrowing by a larger set of borrowers who may find it difficult to directly access overseas markets. This dispensation for raising such borrowings is available till October 31, 2022” it said.
5.  External Commercial Borrowings (ECBs): Under the automatic external Commercial Borrowing (ECB) route, eligible borrowers are allowed to raise funds through their AD banks, without approaching the RBI, as long as the borrowing is in conformity with the prudential parameters of the ECB framework such as all-in-cost ceiling, minimum maturity requirements, and the overall dynamic ceiling. RBI now temporarily increased the limit under the automatic route from US$ 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 above dispensations are available up to December 31, 2022.

According to RBI, the Indian Rupee has depreciated by 4.1 per cent against the US dollar during the current financial year so far (up to July 5), which is modest relative to other EMEs and even major advanced economies (AEs). India’s foreign exchange reserves stood at US$ 593.3 billion as of June 24, 2022, supplemented by a substantial stock of net forward assets.