RBI eases overseas borrowing to spur forex inflows

Central bank relaxes interest rates on foreign currency deposits by NRIs, loosens FPI debt purchase norms

The Reserve Bank of India (RBI) on Wednesday announced a slew of temporary measures aimed at boosting foreign exchange inflows, including a doubling in the overseas borrowing limit for eligible corporates and removal of interest rate ceilings for NRIs’ foreign currency deposits. The move comes at a time when persistent capital outflows and a widening trade deficit have led to a sharp depreciation in the value of the Indian rupee to new record lows against the U.S. dollar.

Observing that the rupee had depreciated by 4.1% against the dollar (upto July 5) since the beginning of this financial year, the RBI said that, barring portfolio investments, capital flows remained stable with an adequate level of reserves providing a buffer against external shocks. India’s foreign exchange reserves stood at $593.3 billion as on June 24, supplemented by a substantial stock of net forward assets, it said.

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

As part of the measures, banks have been exempted from maintaining the stipulated Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on incremental FCNR(B) and NRE term deposits mobilised up to November 4. “It has been decided that with effect from the reporting fortnight beginning July 30, incremental FCNR(B) and NRE deposits with reference base date of July 1, 2022, will be exempt from the maintenance of CRR and SLR,” the RBI said in a circular.

It also allowed banks to temporarily raise fresh FCNR(B) and NRE deposits without reference to the extant regulations on interest rates, with effect from July 7 and up to October 31, 2022.

To encourage foreign portfolio investment into debt, the RBI said the choice of government bonds available for investment under the fully accessible route (FAR) would be widened, with 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, designated as specified securities under the FAR.

Investments by FPIs in government securities and corporate debt made till October 31 would be exempted from short term limits, the RBI added. These investments would not be reckoned for the short-term limit till maturity or sale of such investments.