The Reserve Bank of India (RBI) on Wednesday announced a string of measures to boost foreign exchange inflows, including allowing overseas investors to buy short-term corporate debt and opening of more government securities under the fully accessible route.
The move, aimed at cushioning a falling rupee, follows the government’s imposition of an export levy on petroleum goods and a hike in the import duty on gold.
In a statement laying down easier norms for sourcing of deposits from non-resident Indians (NRIs), debt investments by foreign portfolio investors (FPIs) on the shorter end and foreign currency borrowings, the central bank said that all capital flows, barring portfolio investments, remain stable and an adequate level of reserves provide a buffer against external shocks.
“Reflecting these strong fundamentals, the Indian rupee has depreciated by 4.1% against the US dollar during the current financial year so far (up to July 5), which is modest relative to other EMEs (emerging market economies) and even major advanced economies (AEs),” the RBI said. India’s foreign exchange reserves stood at $593.3 billion as on June 24, supplemented by a “substantial stock” of net forward assets.
Forward premia saw a spike following the RBI’s announcement. The rupee ended at 79.30 to the US dollar, up from 79.36 at Tuesday’s close.
The RBI has been intervening to stem the depreciation in the rupee and has spent over $40 billion defending the currency since February.
The central bank has decided to exempt banks from including incremental foreign currency non-resident (bank) [FCNR(B)] and non-resident (external) rupee (NRE) deposits with a reference base date of July 1, 2022 from the maintenance of cash reserve ratio (CRR) and statutory liquidity ratio (SLR). This relaxation will be available for deposits mobilised up to November 4, 2022.
The cap on interest rates on such deposits has also been removed with effect from July 7 and up to October 31, 2022. At present, interest rates on FCNR(B) deposits are subject to ceilings of overnight alternative reference rate (ARR) for the respective currency/swap plus 250 basis points (bps) for deposits with maturities between one year and less than three years. For deposits maturing in three years to five years, the rates are capped at overnight ARR plus 350 bps. Under existing norms, NRE deposits must not yield more than prevailing rates offered by banks on comparable domestic rupee term deposits.
The measures include a move to increase the choice of debt instruments available to FPIs. All new issuances of G-secs of seven-year and 14-year tenors will be available for investment under the fully accessible route (FAR), along with the currently available securities of five-year, 10-year and 30-year tenors.
FPI investments made till October 31, 2022 will be exempted from the requirement of having a maximum of 30% of investments each in government securities and corporate bonds having a residual maturity of less than one year. These investments will not be reckoned for the short-term limit till maturity or sale of such investments. Also, FPIs will be provided with a limited window till October 31, 2022 during which they can invest in corporate money market instruments with an original maturity of up to one year. The current norms mandate investment only in corporate debt instruments with a residual maturity of at least one year.
Authorised dealer category-I (AD Cat-I) banks will now be allowed to utilise their overseas foreign currency borrowings (OFCBs) for lending in foreign currency for purposes other than export finance. The measure is aimed at facilitating foreign currency borrowing by a larger set of borrowers who may find it difficult to directly access overseas markets, the RBI said.
While welcoming the measures, economists said they will play out only over a period of time. Rahul Bajoria, MD & chief India economist, Barclays, said, “The measures announced today are fundamentally good steps to attract capital, in our view, but may take some time to have an impact as the pressure on the rupee is primarily coming from the large sticky current account deficit, and not just capital outflows.”
The global macroeconomic scenario also clouds the outlook for the rupee. Anindya Banerjee, VP, currency and interest rate derivatives, Kotak Securities, said, “The measures will lead to an increase in inflows, especially from NRIs and on the shorter end of the yield curve. But, pressures on the currency could continue due to the challenging global environment.
“These measures, including raising the borrowing limits for companies as well as liberalising offshore ownership in government debt, are intended to ease onshore dollar tightness and support the rupee,” Radhika Rao, economist at DBS Bank, told Reuters.
Vivek Kumar, an economist with QuantEco Research, said, “We believe these measures can provide some stability to the rupee. However, they are unlikely to alter the trajectory of weakness perpetuated by global factors.”
The central bank increased the limit for external commercial borrowings (ECBs) under the automatic route to $1.5 billion from $750 million or its equivalent per financial year. The all-in cost ceiling under the ECB framework was also raised by 100 bps, subject to the borrower being of investment grade rating.
The RBI had introduced a set of incentives to increase the sourcing of FCNR(B) deposits to protect the rupee during the taper tantrum of 2013. The incentives resulted in inflows worth around $30 billion.
