In the backdrop of global uncertainty and the continuing weakness of the rupee against the US dollar, the Reserve Bank of India on Wednesday unleashed a slew of measures to boost forex inflows by relaxing norms for deposits by non-resident Indians, investments by foreign portfolio investors and enabling external commercial borrowings.

The RBI has doubled the limit under the automatic route for ECBs from $750 million per financial year to $1.5 billion. in a bid to encourage companies to raise money through this route.

Other measures

Other steps include an exemption to banks from Cash Reserve Ratio and Statutory Liquidity Ratio on all Foreign Currency Non-Resident (Bank) and Non-Resident (External) Rupee term deposits. These deposits will be without reference to the extant regulations on interest rates, which could push banks to raise fresh deposits from NRIs.

For FPIs, RBI has allowed access to more funds. For example, it has been decided that FPIs can invest in all-new issuances of G-Secs of 7-year and 14-year tenors, including the current issuances of 7.10 per cent GS 2029 and 7.54 per cent GS 2036. Currently, they can invest in government securities (G-Secs) with 5-year, 10-year and 30-year tenors

“In order to further diversify and expand the sources of forex funding to mitigate volatility and dampen global spillovers, it has been decided to undertake measures to enhance forex inflows while ensuring overall macroeconomic and financial stability,” RBI said.

Focus on NRI deposits

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank, said the measures should help in attracting NRI deposits and also reasonable FPI inflows in the bond market in the shorter end, providing relief to the supply-laden market. “FPI’s permission on corporate money market instruments will also aid inflows in the debt segment,” she said.

The RBI underlined that India’s growth prospects remain strong and resilient while referring to high frequency indicators.

“The current account deficit (CAD) is modest. All capital flows barring portfolio investments remain stable and an adequate level of reserves provides a buffer against external shocks,” it further said.

The move comes just days after the Finance Ministry hiked import duty on gold, slapped export tax on petrol, diesel and jet fuel and imposed a windfall tax on crude oil.

The rupee has depreciated by 4.1 per cent against the US dollar during the current financial year up to July 5 , which is modest relative to other EMEs and even major advanced economies, the RBI said.

On Wednesday, the rupee ended marginally higher at 79.30 against the US dollar from its previous close of 79.37 but it is expected to breach the 80 level later this year.

Analysts believe the RBI actions will have a positive sentimental impact in the short term but will have a marginal positive impact over the medium term.

“However, for sustainable dollar inflows, global as well as domestic stability in growth and inflation is needed,” said Dilip Parmar, HDFC Securities, adding that as the dollar strength continues versus major currencies, the impact of steps taken by the government and central bank on the rupee might not last long.

Abhishek Goenka, Founder and CEO, IFA Global, said it remains to be seen how much impact these measures will have given that corporates were as it is not borrowing much through ECBs. “Even on FCNR deposits, banks are not too sure how much incremental flows will come. FPIs are as it is not interested in domestic bonds,” he said.

India’s foreign exchange reserves stood at $593.3 billion as on June 24, 2022, supplemented by a substantial stock of net forward assets.

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