RBI announces numerous measures to enhance forex inflows

Press Release Dated – 06.07.2022

RBI has made numerous measures to enhance forex inflows while ensuring overall macroeconomic and financial stability. The measures include easing norms for FPI investment in the debt market and increasing the ECB limit under the automatic route from USD 750 million or its equivalent per financial year to USD 1.5 billion. Further, the RBI has relaxed FPI investment norms in government bonds. New bond issuances of 7-year and 14-year maturity would be made eligible for the Fully Accessible Route.

To further diversify and expand the sources of forex funding to mitigate volatility and dampen global spillovers, RBI has decided to undertake measures listed below to enhance forex inflows while ensuring overall macroeconomic and financial stability:

1. Exemption from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on Incremental FCNR(B) and NRE Term Deposits

Among steps taken to attract dollars, the RBI has advised all banks that with effect from 07.07.2022, the interest rate ceiling applicable to Foreign Currency (Non-resident) Accounts (Banks) (FCNR (B)) deposits is being temporarily withdrawn for incremental FCNR (B) deposits mobilized by banks for the period until 31.10.2022.

At present, 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 CRR and SLR.

This relaxation will be available for deposits mobilized up to November 4, 2022. Transfers from Non-Resident (Ordinary) (NRO) accounts to NRE accounts shall not qualify for the relaxation.

2. Temporary withdrawal of interest rates ceiling on FCNR(B) Deposits

Witnessing that the rupee had depreciated by 4.1% against the dollar (up to July 5) since the beginning of this financial year, RBI has decided to temporarily permit banks to raise fresh FCNR(B) and NRE deposits without reference to the extant regulations on interest rates, with effect from July 7, 2022. This relaxation will be available for the period up to October 31, 2022.

At present, interest rates on Foreign Currency Non-Resident Bank [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 year to less than 3 years maturity and overnight ARR plus 350 basis points for deposits of 3 years and above and up to 5 years maturity. In the case of NRE deposits, as per extant instructions, interest rates shall not be higher than those offered by the banks on comparable domestic rupee term deposits.

3. FPI Investment in Debt

Foreign Portfolio Investors (FPIs) can invest in government securities and corporate bonds through three channels:

(a) the Medium-Term Framework (MTF) was introduced in October 2015;

(b) the Voluntary Retention Route (VRR) was introduced in March 2019, and

(c) the Fully Accessible Route (FAR) was introduced in April 2020. To encourage foreign portfolio investment.

Another step taken by RBI to enhance forex inflows while ensuring overall macroeconomic and financial stability are:

3.1 FPI investment in debt flows is being put in place:

i) Fully Accessible Route (FAR): New bond issuances of 7-year and 14-year maturity would be made eligible for the Fully Accessible Route.

In order to increase the choice of G-Secs available for investment by non-resident investors under the FAR as also to augment liquidity across the sovereign yield curve, RBI has decided that 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.

Currently, all central government securities (G-Secs) with 5-year, 10-year, and 30-year tenors are categorized as “specified securities” under the FAR.

ii)  Investments by FPIs in government securities and corporate debt made till October 31, 2022, will be exempted from this short-term limit

Currently, FPI investment in government and corporate debt under the MTF is subject to a macroprudential short-term limit viz., not more than 30 percent of investments each in government securities and corporate bonds can have a residual maturity of less than one year. RBI decided that investments by FPIs in government securities and corporate debt made till October 31, 2022, will be exempted from this short-term limit. These investments will not be reckoned for the short-term limit till the maturity or sale of such investments.

iii) FPIs will be provided with a limited window till October 31, 2022

As part of the macroprudential framework under the MTF, 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 in reckoning the short-term limit for investments in corporate securities.

4. Foreign Currency Lending by Authorised Dealer Category I (AD Cat-I) Banks

4.1 Now AD Cat-I banks can utilise OFCBs for lending in foreign currency to entities for a wider set of end-use purposes

To enhance forex inflows RBI has decided that AD Cat-I banks can 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). 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.

Formerly, AD Cat-I banks can undertake overseas foreign currency borrowing (OFCB) up to a limit of 100 percent 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 export finance.

5. ECB limit increased under the automatic route from USD 750 million or its equivalent per financial year to USD 1.5 billion

For ensuring financial stability RBI has decided to increase the limit under the automatic route from US$ 750 million or its equivalent per financial year to US$ 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.

5.1 RBI hikes all-in-cost ceiling under ECB by 100bps

At this time under the automatic ECB route, eligible borrowers are allowed to raise funds through their AD banks, without approaching the RBI, as long as the borrowing conforms with the prudential parameters of the ECB framework such as all-in cost ceiling, minimum maturity requirements, and the overall dynamic ceiling.

Click Here To Read The Full Press Release