RBI, had by way of its Press Release dated July 6, 2022 (‘Press Release’) proposed to introduce multiple liberalization measures with respect to inter alia FPIs and external commercial borrowings (‘ECBs’) with a view to diversify and expand the sources of foreign exchange funding for mitigating volatility caused by the geopolitical circumstances currently existing in Europe and the world at large.

Subsequently, to give effect to the liberalization measures introduced by RBI through the Press Release, RBI released further Circulars/Notifications i.e., (i) Circular on Investment by Foreign Portfolio Investors (FPI) in Debt – Relaxations dated July 7, 2022 (‘FPI Circular’); (ii) Circular on External Commercial Borrowings (ECB) Policy – Liberalization Measures dated August 1, 2022 (‘ECB Circular’); and (iii) Foreign Exchange Management (Borrowing and Lending) (Third Amendment) Regulations, 2022 dated July 28, 2022 (‘FEMA (Borrowing and Lending) Regulations Amendment’).

The broad scheme of the liberalization measures contained in the Press Release, FPI Circular, ECB Circular and FEMA (Borrowing and Lending) Regulations Amendment can be summarized as follows –

i.     FPIs –

Under the Press Release, concessions have been made with respect to the investment by FPIs in Government securities under the automatic route, whereby all new issuances of Government securities of 7-year and 14-year tenors would be classified as ‘specified securities’ under the automatic route. Additionally, RBI has also relaxed the macroprudential short-term limit for FPI investment in Government and corporate bonds under the medium-term framework for investments made until October 31, 2022. Finally, as part of the macroprudential framework under the medium-term framework, FPIs are also permitted to invest, for a limited period expiring on October 31, 2022, in corporate money market instruments viz., commercial paper and non-convertible debentures with an original maturity of up to one year.

Prior to the release of the FPI Circular, FPIs were required to ensure that the short-term investments by an FPI in Government securities (Central Government securities, including treasury bills and state development loans) and corporate bonds will not exceed 30% of the total investment of that FPI in any category. Under the FPI Circular, RBI has exempted investments by FPIs in Government securities and corporate bonds made between July 08, 2022 and October 31, 2022 from the limit of 30%. Additionally, under the FPI Circular, FPIs are allowed to invest in commercial papers and non-convertible debentures with an original maturity of up to one year, during the period between July 8, 2022 and October 31, 2022. Such investments will be exempted from the limit on short-term investments till maturity or sale of such investments.

ii.    ECBs –

Under the existing guidelines applicable to ECBs, eligible ECB borrowers are allowed to raise ECB up to US$750 million or equivalent per financial year under the automatic route. The Press Release and the ECB Circular have mandated the temporary increase in the borrowing limit under the automatic route from US$750 million to US$1.5 billion. Necessary amendments were also made to the Foreign Exchange Management (Borrowing and Lending) Regulations to reflect the change. Further, the all-in cost ceiling for ECBs was increased by 100 basis points for eligible borrowers having investment grade rating from Indian credit rating agencies. The relaxation in borrowing limit as well as the increase in the all-in cost ceiling will be applicable till December 31, 2022.