Though India’s growth prospects remain strong and resilient, the Reserve Bank of India further liberalized norms to boost inflows of foreign exchange, amid the rupee falling against the US dollar. The Reserve Bank of India, known for its timely action, has been closely monitoring the liquidity conditions in the forex market and has stepped in to further diversify and expand the sources of forex funding to ensure macroeconomic and financial stability.
The measures include relaxation of norms for foreign portfolio investors in debt markets, enhancing the limit of external commercial borrowing under the automatic route and temporarily abolishing interest rate caps for banks to attract deposits from non-resident Indians.
1. Exemption from Cash Reserve Ratio and Statutory Liquidity Ratio (SLR) on incremental FCNR(B) and NRE Term Deposits
With effect from the reporting fortnight beginning July 30, 2022 incremental FCNR(B) and NRE deposits with reference base date of July 1, 2022 will be exempt from the maintenance of CRR and SLR. This relaxation will be available for deposits mobilised up to November 4, 2022 .
2. Relaxation of Interest Rates on FCNR(B) and NRE Deposits
The ceiling on interest rates on FCNR(B) and NRE Deposits between 7th July to 31st October 2022 have been removed. This would enable non-resident Indians getting higher returns for bringing foreign exchange into India.
3. FPI Investment in Debt
Foreign Portfolio Investors (FPIs) can invest in government securities and corporate bonds through three channels: (a) Medium Term Framework (MTF), (b) Voluntary Retention Route (VRR) and (c) Fully Accessible Route (FAR)
a. FAR: The basket of “specified securities” under the FAR has been enhanced. All new issuances of G-Secs of 7-year and 14-year tenors, including the current issuances of 7.10% GS 2029 and 7.54% GS 2036, will be designated as specified securities under the FAR.
b. VRR: While there is no update on VRR under the present measures, the RBI had increased the investment limit under VRR by Rs 1,00,000/- crores to Rs. 2,50,000/- crore with effect from April 1, 2022.
i. It has been decided that investments by FPIs in government securities and corporate debt made till October 31, 2022 will be exempted from the short term limit (viz not more than 30 per cent of investments each in government securities and corporate bonds can have 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.
ii. 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. FPIs can continue to stay invested in these instruments till their maturity / sale. These investments will not be included for reckoning the short term limit for investments in corporate securities.
4. Foreign Currency Lending by AD Category Banks
It has now been decided that AD Cat-I Banks can utilise Overseas Foreign Currency Borrowings for lending in foreign currency to domestic entities for a wider set of end-use purposes, subject to the negative list set out for external commercial borrowings (ECBs). The all-in-cost ceiling under the existing ECB framework is also being raised by 1% subject to the borrower being of investment grade rating. The measure is expected 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 is available till October 31, 2022.
5. External Commercial Borrowings
The RBI has now decided to temporarily increase the limit under the automatic ECB route from US$ 750 million or its equivalent per financial year to US$ 1.5 billion. The all-in-cost ceiling under the existing ECB framework is also being raised by 1% subject to the borrower being of investment grade rating. The above relaxations are available up to December 31, 2022. The higher all-in-cost will ease the constraints faced by high yield borrowers.
While the sleuth of measures introduced by RBI clearly demonstrates the bullish attitude of the Indian Government and a strong intent in addressing the current dollar shortage due to global factors, it would be interesting to monitor the trajectory of the Indian rupee and the strategy of the foreign investors who are currently averse to emerging market economies. This is a step forward in the right direction and could be a silver lining for foreign investors as well as the domestic debt and equity markets.
 Transfers from Non-Resident (Ordinary) (NRO) accounts to NRE accounts shall not qualify for the relaxation.