RBI lines up steps to boost foreign inflows to stem decline in rupee

The Reserve Bank of India (RBI) has announced a series of measures to diversify sources of forex funding to mitigate volatility and dampen global spill overs.

“The global outlook is clouded by recession risks. Consequently, 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,” the RBI said in a release. “As a result, emerging market economies (EMEs) are facing retrenchment of portfolio flows and persistent downward pressures on their currencies."

The central bank has exempted incremental Foreign Currency Non-Resident (Bank), or FCNR (B), and Non-Resident (External) deposits of banks for computation of Net Demand and Time Liabilities to maintain Cash Reserve Ratio and Statutory Liquidity Ratio.

An FCNR account is meant for those who wish to hold the deposit in a foreign currency. Presently, FCNR(B) deposits can be placed in six currencies via the US dollar, Pound sterling, Japanese Yen, Euro, Australian Dollar and Canadian Dollar.

This relaxation will be available for deposits mobilised up to November 4. Transfers from Non-Resident (Ordinary) (NRO) accounts to NRE accounts shall not qualify for the relaxation, said the RBI.

Further, the RBI has also decided to temporarily permit banks to raise fresh FCNR(B) and NRE deposits without reference to current regulations on interest rates with effect from July 7. This relaxation is available up to October 31.

Also read: The good, the bad and the ugly: Where will the rupee end up?

The measures from the central bank come amid heightened volatility in the foreign exchange market, with the Indian rupee’s exchange rate against the dollar hitting fresh all-time lows nearly every other day. Emerging market assets are battered by a global risk-off, which has triggered a flight to safe-haven assets. Foreign money continues to leave Indian assets while the country's trade deficit worsens.

The RBI intervenes in the foreign exchange market to control the rupee’s volatility. The central bank is estimated to have sold $30 billion-$40 billion in the spot and forwards markets over the past six weeks, say traders. Even if foreign outflows were to accelerate, market participants are of the opinion that the RBI is capable of offsetting those as it seeks to maintain the rupee’s performance among the EM pack.

In its statement on July 6, the RBI said it had an “adequate level” of foreign exchange reserves to provide a buffer against external shocks. Commenting on the rupee’s fall, the central bank said the Indian currency had depreciated by 4.1 percent against the US dollar so far in FY23. This, as per the RBI, is “modest” when compared to the movement of other emerging market and advanced economies’ currencies.

Another one of the measures announced by the RBI today was to classify all new issuances of government bonds of 7- and 14-year maturity – including the current issuances of the 7.10 percent 2029 and 7.54 percent 2036 bonds – under the Fully Accessible Route (FAR) for foreign portfolio investors.

Under FAR, eligible foreign investors can invest in certain government securities without any restrictions.

Further, foreign portfolio investors’ (FPIs) can now invest in government and corporate bonds with residual maturity of less than one year. This exemption is valid until October 31.

At present, FPIs’ short-term investments in government and corporate debt under the medium-term framework is capped at 30 percent of their total investments in each.

Some of the other measures announced by the RBI are as follows:

* FPIs can, until October 31, invest in commercial papers and non-convertible debentures with an original maturity of up to one year.
* Authorised Dealer Category I (AD Cat-I) banks can extend foreign currency loans using overseas foreign currency borrowing for a wider set of end-use purposes until October 31. These purposes will be subject to the negative list set out for external commercial borrowings. Until now, banks’ overseas foreign currency borrowings could only be used to lend for export finance.

* The external commercial borrowings limit for companies under the automatic route has been doubled to $1.5 billion per financial year.