RBI liberalises norms to boost forex inflows to shore up rupee

The measures include easing norms for FPI investment in debt market, and increasing the ECB limit under the automatic route from $750 mn or its equivalent per financial year to $1.5 bn

Reserve Bank of India (RBI) on Wednesday further liberalised norms to boost inflows of foreign exchange, including doubling the borrowing limit under the ECB route, amid the rupee falling against the US dollar.

In a statement, the central bank said it 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 measures taken by the central bank comes in the backdrop of rupee depreciating by 4.1 per cent against the US dollar during the current financial year so far (up to July 5) amid the ongoing geopolitical tensions.

"In order to further diversify and expand the sources of forex funding so as to mitigate volatility and dampen global spillovers", the central bank said it has decided to undertake five measures to enhance forex inflows while ensuring overall macroeconomic and financial stability.

The measures include easing norms for FPI investment in debt market, and increasing the External Commercial Borrowing (ECB) limit under the automatic route from $750 million or its equivalent per financial year to $1.5 billion.

Here are the measures:

1) Exemption from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on Incremental FCNR(B) and NRE Term Deposits

At present, 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. It has been decided that with effect from the reporting fortnight beginning July 30, 2022 incremental FCNR(B) and NRE deposits with 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.

2) Interest Rates on FCNR(B) and NRE Deposits

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. It has been decided to temporarily permit 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.

3) FPI Investment in Debt

Foreign Portfolio Investors (FPIs) can invest 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, the following changes to the regulatory regime relating to FPI investment in debt flows are being put in place:

Fully Accessible Route (FAR): Currently, all central government securities (G-Secs) with 5-year, 10-year and 30-year tenors are categorized as “specified securities” under the FAR. In order to increase the choice of G-Secs available for investment by non-resident investors under the FAR as also to augment liquidity across the sovereign yield curve, 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. It has been 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.

As part of the macroprudential framework under the MTF, FPIs can invest only in corporate debt instruments with a residual maturity of at least one year. It has been decided that FPIs will be provided with a limited window till October 31, 2022 during which they can invest in corporate money market instruments viz., 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 / sale. These investments will not be included for reckoning the short term limit for investments in corporate securities.

4) Foreign Currency Lending by Authorised Dealer Category I (AD Cat-I) Banks

At present, 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 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. It has now been 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.

5) External Commercial Borrowings (ECBs)

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 $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.