reserve Bank of India ,reserve Bank of India) Wednesday took the first step to attract Dollar Inflows amid unabated outflow of portfolio funds to avoid sinking Rupee Protect forex reserves from their lifetime lows against the US currency and rapidly depleting foreign exchange reserves when global liquidity is abundant.

The central bank eased several restrictions on the flow of foreign investment, including conditions governing interest rates. foreign currency deposit by foreign Indians. The limit on External Commercial Borrowings (ECBs) under the automatic route has also been doubled.

Further, foreign portfolio investors (FPIs) in debt securities will now have a wider choice of eligible instruments, while restrictions on maturity have also been eased to attract shorter-duration funds, which are dollar-backed assets. appears to be in the midst of a one-way flight to capital.

“The Reserve Bank is closely and continuously monitoring the liquidity position in the foreign exchange market and taking necessary steps in all its areas to ease the dollar tightness with a view to ensuring orderly functioning of the market,” RBI said in a statement. Is raised.” “In order to further diversify and expand the sources of forex funding so as to reduce volatility and reduce global spillovers, it has been decided to undertake (these) measures.”

The central bank, which was sitting on record high foreign exchange reserves in late 2021, is taking a dip in reserves to arrest the unprecedented fall in the rupee. The Indian monetary unit has lost 6.26% against the dollar in this calendar year on account of outflows. Foreign portfolio investors have pulled out a record $30.34 billion so far this year, putting a lot of pressure on the rupee.

shrinking stock

Reserves have shrunk by nearly $50 billion from a peak of $642.45 billion reported in the week ending September 3 last year, although some of the reduction is due to the central bank’s revaluation of foreign assets. The US dollar index, or DXY, which measures the greenback’s strength, is up 11.6% this year, data from MarketWatch showed. The outflow gained momentum with the US and other global central banks raising policy rates.

Ashish Vaidya, managing director, DBS Bank India, said, “RBI’s measures are indicating regulatory preparedness to deal with further chaos in the money market.” “How much money will flow in will be a function of domestic deposit cost versus land cost of NRE or FCNR deposits. Institutions looking to gain a larger pool of funds will find these windows viable. ,

The central bank allowed banks to receive FCNR(B) and NRE deposits from overseas Indians without any interest rate cap. Such discounts are available till October 31 and November 4 respectively.

Also, FPIs can now invest in commercial papers and non-convertible debentures with an original maturity of up to one year. An FPI is mandated to invest not more than 30% each in government and corporate bonds with residual maturity of less than one year. A relaxation of about four months will be given in the short term limit.

In addition, the fully accessible route, a bespoke channel for debt investment by foreign investors, will expand its universe of government securities and include 7-year and 14-year papers.

The central bank created additional space for non-bank lenders to tap the offshore lending market, raising the ceiling from $750 million to $1.5 billion. A local borrower taking advantage of the ECB route can also offer up to 100 basis points more to international investors; This limit is currently capped at 500 basis points.

One basis point is 0.01 percentage point.

However, a borrower needs to be rated at investment grade to avail this exemption, available till December 31.

The RBI also allowed banks to expand the use of foreign currency lending (OFCB). RBI said a select category of banks can use OFCBs for lending in foreign currency for a broader set of end-use purposes.

‘gestation period’

Rahul said, “The measures announced today are fundamentally good steps to attract capital, but it may take some time to have an effect as the pressure on the rupee is mainly coming from the large, sticky current account deficit.” and not just outflow of capital.” Bajoria, economist, Barclays.

The country’s banking system attracted $30 billion in FCNR-B deposits during the so-called taper tantrum, which helped offset the rupee’s depreciation and rising growth. foreign exchange reserves, The local currency was under pressure at the time following US plans to slow bond purchases.

Liberalization of capital accounts began in India after the balance of payments crisis of 1991.

Indian Ratings Director Soumyajit Niyogi said, “These measures are aimed at addressing the depleting foreign exchange reserves and adverse incremental debt-deposit ratio. “The surplus liquidity in the banking system is eroding at a time when the demand for credit has gained strong traction. If the pressure on deposits continues, it will start adversely affecting credit flow and lending rates in the real economy as well.