There are several factors behind the free fall of the Indian currency and the government had earlier said that it is monitoring the situation closely
The Indian Rupee continues to show weakness against the US dollar and has hit a record low of Rs 79.38 as of Thursday. As per the analysts, the rupee will continue to lose value in the upcoming months and pass the psychological barrier of Rs 80 against the dollar.
There are several factors behind the free fall of the Indian currency and the government had earlier said that it is monitoring the situation closely.
That said, the Reserve Bank of India (RBI) has now come to the Rupee’s rescue with the announcement of several measures.
Let’s take a look at what steps India’s central bank is taking to arrest the rupee fall.
Why the Rupee is Falling?
High crude oil prices, a strong dollar overseas, and heavy foreign fund outflows from the domestic markets are among the reasons for the rupee's fall.
Foreign institutional investors (FIIs) have sold shares worth $28.4 billion so far this year. The rupee has depreciated more than 6 per cent against the dollar so far this calendar year.
What has been RBI’s response?
On June 24, RBI deputy governor Michael Patra said the central bank will continue to support the rupee's stability and would not permit any abrupt fall of the rupee against the dollar.
According to reports, the central bank sold dollars last week for between 78.97 and 78.98 per US dollar and significantly increased its foreign exchange reserves to protect the rupee from a rapid devaluation.
On Wednesday, the RBI 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.
More foreign investments in international currency into the country would mean more demand for the rupee in exchange for buying the domestic currency-denominated Indian assets.
"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 the debt market and increasing the External Commercial Borrowing (ECB) limit under the automatic route, among others.
Here’s a look at the measures taken by the RBI:
ECBs limit enhancement
Under the automatic ECB route, the corporate and other entities are allowed to raise foreign currency loans with an overall limit of $750 million. 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.
Expansion of scope for foreign currency lending by banks
Currently, the foreign currency lending by category -I authorised dealers, which are mostly domestic and foreign banks, are allowed to undertake overseas foreign currency borrowing up to a limit of 100 per cent of their Tier-1 capital or $10 million, whichever is higher.
There is, however, a restriction on the end-use of funds to export finance only.
The central bank has now decided that banks can utilise these funds 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).
FPI Investment in Debt
The RBI has further relaxed investments by FPIs in government securities and corporate bonds.
In the G-sec segment, the RBI has increased the choices for FPIs from 5-year, 10-year and 30-year papers to all new issuances of G-Secs of 7-year and 14-year tenors.
There is also a limit of 30 per cent investment in the short-term G-sec paper and corporate bonds of less than one year.
Currently, FPIs are allowed to 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.
Exemption from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on Incremental FCNR(B) and NRE Term Deposits
Currently, banks are required to include all Foreign Currency Non-Resident (Bank) [FCNR(B)] and Non-Resident (External) Rupee (NRE) deposit liabilities to calculate the Net Demand and Time Liabilities (NDTL) for maintenance of statutory requirements such as CRR and SLR.
The RBI said that from the reporting fortnight starting July 30, 2022, incremental FCNR (B) and NRE deposits with a reference base date of July 1, 2022, will be exempted from maintenance of CRR and SLR. This exemption will be available for deposits up to November 4, 2022. Transfers from Non-Resident (Ordinary) (NRO) accounts to NRE accounts will not qualify for the exemption.
Interest Rates on FCNR(B) and NRE Deposits
RBI has temporarily allowed banks to raise fresh Foreign Currency Non-Resident Bank [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.