The Reserve Bank of India (“RBI”) by way of a press release dated July 6, 2022, has liberalized forex flows and eased overseas borrowing. India’s external sector has exhibited resilience and viability in exports of goods and services and increasing remittances. Most capital inflows barring portfolio investments are stable and an adequate level of reserves are providing for a buffer against external shocks. India’s foreign exchange reserves previously stood at US $ 593 (Five Hundred Ninety – Three billion dollars) as on June 24, 2022, and these were supplemented by a substantial stock of net forward assets.
The RBI has been closely observing and monitoring the liquidity conditions in the forex market and has stepped in as needed with the objective of ensuring orderly market functioning. To diversify and expand sources, it has been decided to undertake certain measures to enhance forex inflows while ensuring macroeconomic and financial stability.
Banks are required to include all Foreign Currency Non-Resident (Bank) (“FCNR(B)”) and NRE deposit liabilities for computation of Net Demand and Time Liabilities (“NDTL”) for maintenance of CRR and SLR. It has been decided that these deposits will be exempt from the maintenance of CRR and SLR. This relaxation will be available for deposits mobilized up to November 4, 2022.
2. Interest Rates on FCNR (B) and NRE Deposits
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 year to less 3 years maturity and overnight ARR plus 350 basis points for deposits of 3 years and above and up to 5 years maturity. For NRE deposits, interest rates shall not be higher than those offered by the banks on comparable domestic rupee term deposits. It has been decided to temporarily permit banks to raise fresh FCNR(B) and NRE deposits without reference to extant regulations on interest rates, with effect from July 7, 2022. This relaxation will be available till October 31, 2022.
Please find a copy of the master direction, here.
3. FPI Investment in Debt
Foreign Portfolio Investors (“FPIs”) can invest in government securities and corporate bonds through three channels, i.e., a) the Medium-Term Framework (“MTF”) introduced in October 2015; b) the Voluntary Retention Route (“VRR”) introduced in March 2019; and c) the Fully Accessible Route (“FAR”) introduced in April 2020.
Currently, all central government securities with 5-year, 10-year and 30-year tenors are categorized as “specified securities” under the FAR. 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, it has been 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.
Please find a copy of the notification for Investment by Non-Resident investors, here.
FPIs in government securities and corporate debt made till October 31, 2022, will be exempted from this short-term limit. 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 until October 31, 2022, during which they can invest in corporate money market instruments, i.e., commercial paper and non-convertible debentures with an original maturity of up to one year.
Please find a copy of the complete notification on FPI investment, here.
4. Foreign Currency Lending by Authorised Dealer Category I (“AD Cat-I”) Banks
Presently, AD Cat-I banks can undertake overseas foreign currency borrowing (“OFCB”) up to a limit of 100% (Hundred Percent) of their unimpaired Tier 1 capital or US $10 million (Ten Million Dollars), whichever is higher. The funds that are borrowed cannot be used for lending in foreign currency except for the purpose of export finance. It has been decided that AD Cat-I banks can utilize 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.
Please find a copy of the notification, here.
5. External Commercial Borrowings
Under the automatic ECB route, eligible borrowers are allowed to raise funds through their AD banks, without approaching the RBI, if the borrowing is in uniformity with the prudential parameters of the ECB framework such as all-in cost ceiling, minimum requirements, and the overall dynamic ceiling. It has now been decided to temporarily increase the limit under the automatic route from US $ 750 million (Seven Hundred Fifty Million Dollars) or its equivalent per financial year to US $ 1.5 billion (One Billion Five Hundred Million Dollars). The above dispensation is available up to December 31, 2022.
Please find a copy of the press release, here.
Contributed by Vallari Dronamraju (Associate) and Aditi Singh Kashyap (Associate).
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