The INR has fallen to record low levels against the USD and the USD/INR pair is currently trading above Rs 79 mark. On Wednesday, RBI to stem the sharp fall of INR, has announced a host of measures to enhance forex inflows including allowing overseas investors to buy short-term corporate debt and opening of more government securities under the fully accessible route.
RBI in a statement release states that, “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 USD. As a result, emerging market economies (EMEs) are facing retrenchment of portfolio flows and persistent downward pressures on their currencies”.
RBI earlier informed that it has 'adequate level' of forex to act as a cushion against foreign shocks. INR so far in FY23 has collapsed by 4.1% and is at a better standing in comparison to other EM and advanced economies' currencies.
Here are the details of forex measures taken by RBI to stem the fall of INR:
Exemption from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on Incremental FCNR(B) and NRE Term Deposits
RBI has exempted incremental FCNR(B) as well as non-resident(external) or NRE deposits for calculation of net demand as well as time liabilities for maintaining CRR and SLR. An FCNR account is for those individuals who wish to maintain deposits in a foreign currency. The said leeway is for a limited time period until November 4. Further RBI made the clarification that deposits transferred from NRO account to NRE shall not be eligible for the said leeway.
Interest Rates on FCNR(B) and NRE Deposits
In 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. It has been 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.
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) 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 (G-Secs) with 5-year, 10-year and 30-year tenors are categorised as “specified securities” under the FAR. 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, 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.
Foreign Currency Lending by Authorised Dealer Category I (AD Cat-I) Banks
At present, AD Cat-I banks can undertake overseas foreign currency borrowing (OFCB) up to a limit of 100 per cent of their unimpaired Tier 1 capital or $10 million, whichever is higher. The funds so borrowed cannot be used for lending in foreign currency except for the purpose of export finance.
External Commercial Borrowings (ECBs)
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 is in conformity with the prudential parameters of the ECB framework such as all-in cost ceiling, minimum maturity requirements and the overall dynamic ceiling. It has now been decided to temporarily increase the limit under the automatic route from USD 750 million or its equivalent per financial year to USD 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. The above dispensations are available up to December 31, 2022.