A steep depreciation in the value of rupee against the US dollar in a short period of time has forced the Reserve Bank of India (RBI) to encourage dollar inflows into the country. For the first time, the RBI has announced a series of measures directed at protecting the value of rupee. Let's understand the implications of each of the measure.
Exemption from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on Incremental FCNR(B) and NRE Term Deposits
FCNR(B) is a term deposit held in foreign currency whereas the NRE Term deposit is a deposit held in Indian currency. There is a requirement of cash reserve ratio (CRR ) at 4.50 per cent and statutory liquidity ratio (SLR) at 18 per cent. These higher statutory requirements where the banks earn sub optimal returns discourages the banks to go aggressively for raising such deposits. The RBI's current move will open up the lending and investment window for banks to deploy these deposits at a much higher return than in the earlier regulatory regime.
Freeing up of interest rate limits on FCNR(B) and NRE Deposits
Currently, the interest on FCNR (B) and NRE deposits are linked to a global reference rate plus additional 250 -35-0 basis points. The RBI has now temporarily removed the interest rate cap. This will allow banks to offer a higher interest rate and attract dollar flows.
More choices for foreign investors to invest in G-Sec and corporate debt
The RBI has further relaxed the investments by foreign portfolio investors (FPIs) in government securities and corporate bonds. In the G-sec segment, the RBI has increased the choices for FPI from 5-year, 10-year and 30-year paper to all new issuances of G-Secs of 7-year and 14-year tenor. There is also a limit of 30 per cent investment in short term G-sec paper and corporate bonds of less than one year.
“It has been decided that investments by FPIs in government securities and corporate debt made till October 31, 2022 will be exempted from this short-term limit,” states RBI.
Currently, FPIs are allowed to 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.
Expansion of lending scope for foreign currency lending by banks
Currently, the foreign currency lending by category -I authorised dealers, which are mostly domestic and foreign banks, are allowed to undertake overseas foreign currency borrowing up to a limit of 100 per cent of their Tier 1 capital or $10 million, whichever is higher. There is, however, a restriction on the end use of funds to export finance only. The central bank has now decided that banks can utilise these funds 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).
ECBs limit enhancement from $750 million to $1.5 billion.
Under the automatic ECB route, the corporate and other entities are allowed to raise foreign currency loans with an overall limit of $750 million. It has now been decided to increase the limit under the automatic route from $750 million or its equivalent per financial year to $1.5 billion.