With the Indian currency sliding to new lows this month, the Reserve Bank of India (RBI) on Wednesday announced a slew of measures to increase the dollar supply and prop up the rupee. 

These include exempting foreign currency deposits from CRR and SLR, temporarily permitting banks to raise fresh FCNR(B) and NRE deposits without reference to the extant regulations on interest rates, allowing foreign investors to invest in short-term corporate debt, letting the purchase of more government securities and doubling the borrowing limit under the ECB route.

The measures come at a time when the rupee has depreciated by 4.1% against the US dollar during the current financial year (up to 5 July) amid the war in Ukraine and the geopolitical tensions following it. The rupee slipped to a new low of 79.37 to a dollar on Tuesday and currency experts have predicted it to breach the 80-mark in the year.

Earlier, the central government raised import duties on gold and increased levies on exports of petrol and diesel to address a fast-widening current account deficit.

“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. As a result, emerging market economies are facing retrenchment of portfolio flows and persistent downward pressures on their currencies," the RBI said.

The five new measures to boost forex inflows are: 

1) Exemption from CRR and SLR on incremental FCNR(B) and NRE term Deposits

To make it more attractive for banks to raise interest rates on FCNR (B) and NRE deposits, the RBI has exempted them from cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements.

The RBI said that 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. Transfers from Non-Resident (Ordinary) (NRO) accounts to NRE accounts shall not qualify for the relaxation.

Currently, banks are required to include all Foreign Currency Non-Resident (Bank) [FCNR(B)] and Non-Resident (External) Rupee (NRE) deposit liabilities for computation of Net Demand and Time Liabilities (NDTL) for maintenance of statutory requirements such as CRR and SLR. 

2) Interest rates on FCNR(B) and NRE deposits

The RBI has temporarily removed interest rate curbs on these two deposits, with effect from July 7, 2022. This relaxation will be available for the period up to October 31, 2022. 

At present, interest rates on FCNR(B) deposits are subject to ceilings of Overnight Alternative Reference Rate (ARR- an alternative to Libor) for the respective currency plus 250 basis points for deposits of 1 year to less than 3 years maturity and a limit of ARR plus 350 basis points for deposits of 3 years and above and up to 5 years maturity.

In NRE deposits, banks cannot offer higher interest rates than those offered on comparable domestic rupee term deposits.

3) FPI investment in debt

 This is another step to improve inflows from foreign portfolio investors (FPIs). 

Under the fully accessible route (FAR) for investment, all central government securities (G-Secs) with 5-year, 10-year and 30- year tenors are categorised as “specified securities”.

This list has now been widened to include all the new issuances of G-Secs of 7-year and14-year tenors. It also includes the current issuances of 7.10% GS 2029 and 7.54% GS 2036, to be designated as specified securities under the FAR.

Under the medium-term framework route (MTF), investments by FPIs in government securities and corporate debt made till October 31, 2022 will be exempted from the short-term limit. These investments will not be reckoned for the short-term limit till maturity or sale of such investments. 

Currently, FPI investment in government and corporate debt under the MTF route is subject to a macroprudential short term limit viz., not more than 30% of investments each in government securities and corporate bonds can have a residual maturity of less than one year.

4) Foreign currency lending by authorised dealer category I (AD Cat-I) banks

The RBI has relaxed the rules for banks who undertake overseas foreign currency borrowing (OFCB). 

Previously, the funds were meant only to finance exports. The end-use purpose has now been widened so that a larger set of borrowers may find it easier to directly access overseas markets.

The RBI said the AD Cat-I banks can now utilise OFCBs for lending in foreign currency to entities for a wider set of end-use purposes, subject to the negative list set out for external commercial borrowings (ECBs). This dispensation for raising such borrowings is available till October 31, 2022.

At present, AD Cat-I banks can undertake OFCBs up to a limit of 100% of their unimpaired Tier 1 capital or US$10 million, whichever is higher. The funds so borrowed cannot be used for lending in foreign currency except for the purpose of export finance. 

5. External commercial borrowings

The RBI has raised the limit under the automatic route for external commercial borrowings (ECBs) to $1.5 billion per company from $750 million.

Under the ECB framework, the all-in cost ceiling — currently at 450 basis points over the benchmark rate — is being raised by 100 basis points. This is subject to the borrower being of investment grade rating. The relaxation will be available up to December 31. 

“RBI’s measures are a welcome step in attracting capital flows at a time when India is witnessing heavy stress on current account deficit and persistent FPI outflows. INR has remained under extreme pressure amidst increasing global volatility as markets continue to gauge the monetary tightening. The flight to safety and elevated crude oil prices have deteriorated the INR outlook. The measures should help in attracting NRI deposits and also reasonable FPI inflows in the bond market in the shorter end, providing relief to the supply-laden market. FPI’s permission on corporate money market instruments will also aid inflows in the debt segment,” said Kotak Bank chief economist Upasna Bhardwaj.      

Bank of Baroda general manager Sushanta Kumar Mohanty believes the market sentiment will improve. “The slew of measures will improve the sentiments in the market. The rupee was having a free fall in the last few days. There will now be some stability for the currency,” he said.