RBI relaxed norms to stem rupee slide and to forex inflows

In News: To prevent the slide in the rupee and shore up foreign exchange reserves, the RBI announced a series of measures.

• This includes relaxation in foreign investment in debt, external commercial borrowings, and Non-Resident Indian (NRI) deposits.

Stats

• The rupee depreciated 4.1 per cent to 79.30 against the US dollar in the current financial year.
• Foreign portfolio investors pulled out 2.32 lakh crore in six months, and $50 billion being shaved off forex reserves over the last nine months.

Measures taken

• RBI has allowed banks temporarily to raise fresh Foreign Currency Non-Resident Bank i.e. FCNR(B) and Non-Resident External (NRE) deposits without reference to the current regulations on interest rates.
• Currently, 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 for deposits of 1-3 years maturity and overnight ARR plus 350 basis points for deposits of 3-5 years maturity.
• In the case of NRE deposits, interest rates should not be higher than those offered by the banks on comparable domestic rupee term deposits.
• Investments by FPIs in government securities and corporate debt made till October 31, 2022, will be exempted from this short-term limit.
• These will not be reckoned for the short-term limit of one year till maturity or sale of such investments.
• Currently, 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.
• FPIs will be provided with a limited window till October 31, 2022, during which they can invest in corporate money market instruments like 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 or sale.
• Also the central bank decided to increase the limit under the automatic route for external commercial borrowing (ECB) from $750 million or its equivalent per financial year to $ 1.5 billion.
• The all-in cost ceiling under the ECB framework is also being raised by 100 basis points, subject to the borrower being of investment grade rating.
• Further incremental FCNR(B) and NRE deposits will be exempt from the maintenance of cash reserve ratio and statutory liquidity ratio (SLR).
• This relaxation, which will add to the returns of NRIs

External Commercial Borrowings

• ECBs is a loan availed by an Indian entity from a nonresident lender with a minimum average maturity.
• Most of these loans are provided by foreign commercial banks buyers’ credit, suppliers’ credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds etc.

Advantages of ECBs:

• ECBs provide opportunity to borrow large volume of funds.
• The funds are available for relatively long term.
• Interest rate are also lower compared to domestic funds.
• ECBs are in the form of foreign currencies. Hence, they enable the corporate to have foreign currency to meet the import of machineries etc.

Foreign Currency Non-Resident (Bank) account

• FCNR(B) accounts can be opened by NRIs and Overseas Corporate Bodies (OCBs) with an authorized dealer.
• Rate of interest applicable to these accounts are in accordance with the directives issued by RBI from time to time.

NRE accounts

• NRE accounts can be opened by NRIs and OCBs with authorized dealers and with banks authorized by RBI.
• These can be in the form of savings, current, recurring or fixed deposit accounts. Deposits are allowed in any permitted currency.
• Rate of interest applicable to these accounts are in accordance with the directives issued by RBI from time to time.

Source: Indian Express