RBI announces slew of measures to ease forex flows

In the last few days, the fall in the rupee has been really rapid. It crossed the historic mark of 79/$ for the first time ever and now experts are already pegging the dollar at Rs80/$ and beyond. This has happened amidst rising trade deficit, prospects of worsening current account deficit and sustained FPI outflows. In fact, foreign portfolio investors have withdrawn nearly $35 billion from India between October 2021 and June 2022. To prevent the slide in the rupee and shore up forex reserves, RBI has got into action.

On Wednesday, the 06th of July 2022, the RBI announced a slew of measures, including relaxation in foreign investment in debt, external commercial borrowings and Non-Resident Indian (NRI) deposits to give a temporary boost to the rupee. The situation gets all the more worrying since the forex reserves of the RBI depleted by more than $55 billion trying to defend the rupee around crucial resistance levels. With the forex reserve cover now at just about 9 months of imports, the only choice was to make room for more forex flows.

Key measures taken by the RBI

During the week, the RBI announced a slew of measures to tackle the challenge of dwindling reserves and tepid forex flows. Here are a few such measures taken by the RBI.
    1) RBI has permitted the banks to temporarily to raise fresh Foreign Currency Non-Resident Bank FCNR(B) and Non-Resident External (NRE) deposits. These deposits can be raised without reference to the current regulations on interest rates and the window will be available till October 31, 2022. Both are foreign currency flows into India.

    2) The RBI has also stipulated that any investment made by foreign portfolio investors (FPIs) either in government securities or in corporate debt till October 31, 2022, will not be reckoned for the purpose of 1-year maturity limit applicable to such investments. At present, not more than 30% of investments each in G-Secs and corporate bonds can have a residual maturity of below one year. That limit stands frozen till October 2022.

    3) In addition, the FPIs get another limited window till October 31, 2022, wherein they can invest in corporate money market instruments like commercial paper and non-convertible debentures with an original maturity of up to one year. They can stay invested in these instruments till their maturity or sale. These also will not be included for reckoning the short-term limit for investments in corporate securities.

    4) RBI has enhanced the limit under the automatic route for external commercial borrowing (ECB) from $ 750 million (equivalent) 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.

    5) Effective from July 30, 2022, any incremental FCNR(B) and NRE deposits, will be exempt from the maintenance of cash reserve ratio (CRR) and statutory liquidity ratio (SLR). This relaxation, will add to the net effective returns for NRIs and encourage them to park additional funds in the Indian banks.

However, the RBI has expressed confidence that the Indian economy has the resilience and the fundamental strength to see through this temporary crisis. These measures announced by the RBI were more for giving comfort to the markets and confidence in the Indian market system and an assurance of its long term robustness.