Foreign investments

RBI takes steps to attract foreign investment and strengthen the rupee

In order to support the rupee and attract foreign investment into the country, the Reserve Bank of India (RBI) announced a series of measures on Wednesday. These include relaxations of the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on additional FCNR(B) and NRE Term Deposits, relaxation of rules for REITs and increased limits on external borrowing, among others.

The Rupee has been on a downward trend over the past few months and has touched all-time lows several times. It hit a record low of 79.38 per dollar on Tuesday. The local currency stood at 73.77 to the dollar on January 12, 2022, and since then it has fallen over 5 rupees and touched 79.16 on Tuesday. Foreign Portfolio Investors (REITs) also withdrew around Rs 2.2 lakh crore from domestic equities in the first six months of 2022, the highest net withdrawal ever by them.

“The Reserve Bank has continuously and closely monitored liquidity conditions in the foreign exchange market and intervened as needed across all its segments to ease dollar stress in an effort to ensure the orderly functioning of the market,” he said. the central bank said on Wednesday.

To further diversify and broaden the sources of forex funding to mitigate volatility and mitigate the global fallout, the RBI decided to take a few steps. There are:

Exemption from CRR, SLR on FCNR(B) and NRE additional term deposits

The RBI has decided that as of the reporting fortnight commencing July 30, additional FCNR(B) and NRE filings with a baseline date of July 1, 2022 will be exempt from maintaining CRR and SLR. This easing will be available for deposits mobilized until November 4, 2022. Transfers from non-resident (ordinary) (NRO) accounts to NRE accounts are not eligible for the easing.

Currently, banks are required to include all foreign currency non-residents (banks) [FCNR(B)] and Non-Resident (External) Deposit Liabilities in Rupees (NRE) for calculation of Net Demand and Time Liabilities (NDTL) for maintenance of CRR and SLR.

Interest rate on FCNR(B) and NRE deposits

The RBI has now temporarily allowed banks to raise new FCNR(B) and NRE deposits without reference to the prevailing interest rate regulations, effective July 7, 2022. This relaxation will be available for the period up to as of October 31, 2022.

“Currently, interest rates on non-resident foreign banks [FCNR(B)] deposits are subject to alternative overnight benchmark rate caps (ARR) for the relevant currency/swap plus 250 basis points for deposits with a maturity of 1 year to less than 3 years and the ARR overnight plus 350 basis points for deposits of 3 years and over and over 5 years of maturity. In the case of NRE deposits, in accordance with current instructions, interest rates should not be higher than those offered by banks on comparable national rupee term deposits,” the RBI said.

Easing rules on REIT investment in debt

In relaxing existing standards on REIT investments in debt, the RBI said that all new issues of government securities with a maturity of 7 and 14 years would be eligible for the fully accessible route (FAR). Unlike other securities, the REIT’s investment in DSC-designated bonds has no limit.

RBI has also relaxed standards on the residual maturity of REIT investments in government and corporate debt. Investments by REITs in such bonds made through October 31, 2022 are exempt from a short-term limit, whereby no more than 30% of investments may have a residual maturity of less than one year. The central bank also provided a window until October 31 for REITs to purchase money market instruments such as commercial paper with an original maturity of up to one year.

Foreign Currency Lending by Banks Category I (AD Cat-I) Authorized Resellers

Currently, AD Cat-I banks can take foreign currency borrowings abroad (OFCB) up to a limit of 100% of their unimpaired Tier 1 capital or $10 million, whichever is greater . Funds so borrowed cannot be used for foreign currency loans, except for export financing purposes.

The RBI has now ruled that AD Cat-I banks can use OFCBs to lend foreign currency to entities for broader end-use purposes, subject to the established negative list for External Commercial Borrowing (ECB). “The measure is expected to facilitate foreign currency borrowing by a greater number of borrowers who may find it difficult to directly access foreign markets. This exemption to raise such borrowing is available until October 31, 2022,” said the central bank.

Raise the limit on external commercial borrowing

Under the ECB’s automatic route, eligible borrowers are permitted to raise funds through their AD banks, without approaching the RBI, as long as the borrowing falls within the prudential parameters of the framework. the ECB, such as the global cost cap, the minimum maturity requirements and the global dynamic cap.

“It has now been decided to increase the automatic lane limit by $750 million or its equivalent per fiscal year to $1.5 billion. The overall cost cap under the ECB framework is also raised by 100 basis points, subject to the borrower having an investment grade rating, the RBI said.

“The global outlook is clouded by recession risks. As a result, high risk aversion gripped financial markets, causing spikes in volatility, selling of risky assets and significant spillovers including flight to safety and safe-haven demand for the dollar. American. As a result, emerging market economies (EMEs) are facing reduced portfolio flows and continued downward pressures on their currencies,” the RBI said.

Jyoti Prakash Gadia, Managing Director of Resurgent India, said: “The RBI came with the liberalization of currency flows. It is a two-pronged strategy by which the central bank has tried to create obstacles to the flight of REITs on the one hand and to bring in more dollars with attractive interest rates on the other. Apparently, the RBI is trying to cover any possible shortfall in meeting short-term foreign exchange commitments.

Gadia added that a short-term policy measure to improve forex liquidity might not be adequate to attract funds, especially on the ECB front. Therefore, a broader perspective might have been better even for such a short-term arrangement.

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