Liberalisation Of Forex Flows

19 July 2022 • Parul Shekhawat

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Liberalisation Of Forex Flows

19 July 2022 • Parul Shekhawat

In recent times the domestic financial markets are witnessing outflows of overseas investment and the country’s current account deficit is widening as a result of rising crude oil prices and the current geopolitical situation. The Reserve Bank of India (RBI) vide its press release number 2022-2023/481 dated June 6, 2022 announced certain measures to mitigate volatility concerns and expand the sources of foreign funding.

These measures include –

  • Increasing the ECB limits under automatic route from 750 million to per Financial year to $1.5 billion;
  • Easing norms for foreign portfolio investment in debt market;
  • temporarily abolishing interest-rate caps for banks to attract deposits from non-resident Indians

FPI Investment in Debt

The RBI has eased the rules for foreign investors to invest in the government and corporate debt in India:

S. No. Modes of Investment Pre- scenario Post-scenario
         i. Fully Accessible Route (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. In order to increase the choice of G-Secs available for investment by non-resident investors under the FAR and also to enhance 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, which will be designated as specified securities under the FAR.
       ii. Medium-Term Framework (MTF) At present, 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. ii.            The 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. Medium-Term Framework (MTF) iii.            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. The 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 for reckoning the short-term limit for investments in corporate securities.

External Commercial Borrowings (ECBs)

The RBI has decided to

  • Temporarily 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.

The above dispensations are available up to December 31, 2022.

CRR and SRR excused on Foreign deposits and Removed the limits on Interest rates offered by banks on FCNR(B) and NRE term deposits.

S. No. Category New guideline
  Interest Rate on FCNR (B) and NRE Deposits

RBI has advised banks that the interest rate ceiling applicable to Foreign Currency Non-Resident (Bank) (FCNR (B)) and Non- Resident (External) Rupee (NRE) deposits is being temporarily withdrawn for incremental FCNR (B) and NRE deposits mobilized by banks for the period until October 31, 2022 and

Interest rates on NRE deposits shall not be higher than those offered by the banks on comparable domestic rupee term deposits.

The above relaxation shall not be applicable to Ordinary Non-Resident (NRO) Deposits.

  Exemption from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on Incremental FCNR(B) and NRE deposits

RBI has exempted banks from maintaining CRR and SLR on incremental foreign currency and rupee-denominated term deposits raised by Non-Resident from 30th July, 2022 to 4th November, 2022.

 

Implication: As the caps on interest rates have been removed and banks are no longer required to maintain returns on deposits, these measures will allow non-residents to get better returns attracting foreign funds to domestic markets.

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