RBI Unveils Measures To Check Rupee Fall; Raises Overseas Borrowing Limits For Companies

Reserve Bank of India (RBI) on Wednesday raised overseas borrowing limits for companies and liberalised norms for foreign investments in government bonds as it announced a slew of measures to boost foreign exchange inflows in efforts to curb the fall of the rupee. 

Unveiling measures soon after the close of financial markets on Wednesday, the central bank said that all capital flows barring portfolio investments remain stable and an adequate level of reserves provides a buffer against external shocks. 

Among the fresh steps, the cap has been removed on interest rate that lenders can offer on foreign deposits by NRIs. The relaxation will be in force till October. 

The 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)," RBI said in a statement. 

India's foreign exchange reserves stood at USD 593.3 billion as on June 24, 2022, supplemented by a substantial stock of net forward assets, the central bank said. 

According to the statement, RBI 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," it said. 

RBI has increased the External Commercial Borrowing (ECB) limit under the automatic route from USD 750 million or its equivalent per financial year to USD 1.5 billion and eased the norms for FPI investments in the debt market. 

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, as per the statement. 

Further, the central bank has permitted banks to raise fresh FCNR(B) and NRE deposits without reference to the extant regulations on interest rates, with effect from July 7 till 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. It is overnight ARR plus 350 basis points for deposits of 3 years and above, and up to 5 years maturity. 

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. 

Banks have also been given exemption from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on incremental FCNR(B) and NRE Term Deposits. 

The central bank also announced major changes to attract Foreign Portfolio Investors (FPIs) investments in government securities and corporate bonds. 

It has now been decided that all new issuances of G-Secs of 7-year and 14-year tenors, including the current issuances of 7.10 per cent GS 2029 and 7.54 per cent GS 2036, will be designated as specified securities under the Fully Accessible Route (FAR), the RBI said. 

Another relaxation is with respect to the macro prudential short term limit norms for FPI investment in government securities and corporate debt till October 31 under the Medium-Term Framework (MTF) introduced in October 2015. 

As part of the macro prudential 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," as per RBI's statement on 'Liberalisation of Forex Flows'. 

Further, it said FPIs can continue to stay invested in these instruments till their maturity/ sale. 

In addition, measures have been announced 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 too is available till October 31, 2022. 

FPIs can invest in government securities and corporate bonds through three channels: the MTF; the Voluntary Retention Route (VRR); and the Fully Accessible Route (FAR). 

RBI has also flagged that the global outlook is clouded by recession risks and that 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, it noted. 

"India's growth prospects remain strong and resilient. Despite headwinds from geopolitical developments, elevated crude oil prices and tighter external financial conditions, high frequency indicators point to an ongoing recovery in several sectors," RBI said. 

Besides, the central bank said the Purchasing Managers' Index (PMI) relating to services accelerated in June 2022 to its highest level since April 2011 and the expansion of the merchandise trade deficit in June 2022 underlines the strength of domestic demand. 

India's external sector has exhibited resilience and viability on the back of robust exports of goods and services and rising remittances, the RBI said, adding the Current Account Deficit (CAD) is modest. 

On Wednesday, the rupee recovered from its all-time low to close 3 paise higher at 79.30 (provisional) against the US dollar.