RBI takes steps to attract foreign flows, says growth prospects stay strong

The Reserve Bank of India (RBI) on Thursday announced a series of measures to attract foreign flows in a bid to protect the local currency amid depleting foreign exchange reserves. India’s foreign exchange reserves have depleted by $38 billion to below $600 billion since the Russian invasion of Ukraine late February.

While announcing the measures, the central bank said growth prospects for the Indian economy remained strong and resilient, and that despite headwinds from geopolitical developments, elevated crude oil prices, and tighter external financial conditions, high-frequency indicators pointed to an ongoing recovery in several sectors.

“Reflecting these strong fundamentals, the Indian rupee has depreciated by 4.1 per cent against the US dollar during the current financial year so far (till July 5), which is modest relative to other EMEs (emerging market economies) and even major advanced economies (AEs),” the RBI said, adding that India’s foreign exchange reserves stood at $593.3 billion as on June 24, supplemented by a substantial stock of net forward assets.

“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 said.

Among steps taken to attract dollars, banks have been exempted from maintaining the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) for incremental NRE (non-residential external) and FCNR (B) (foreign currency non-resident-bank) deposits with effect from the reporting fortnight beginning July 30. This relaxation will be available for deposits mobilised up to November 4, 2022. Banks also have been allowed to raise fresh FCNR (B) and NRE deposits without reference to the regulations on interest rates, with effect from July 7. This relaxation will be available for the period up to October 31, 2022.

The central bank said it had been closely and continuously monitoring the liquidity conditions in the forex market and had stepped in as needed in all its segments to alleviate dollar tightness with the objective of ensuring orderly market functioning.

Moreover, the RBI has relaxed FPI investment norms in government bonds. New bond issuances of 7-year and 14-year maturity would be made eligible for the Fully Accessible Route.

The RBI also relaxed norms on residual maturity for FPI investments in government and corporate debt. On external commercial borrowing, the limit under the automatic route has been increased from $ 750 million to $ 1.5 billion. The all-in cost ceiling under the ECB framework has been raised by 100 basis points, subject to the borrower being of investment grade rating.

The RBI said Wednesday’s measures were aimed at enhancing exchange inflows while ensuring overall macroeconomic and financial stability.

“In order to further diversify and expand the sources of forex funding so as 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,” the RBI said.

“Overall, a fairly comprehensive set of measures have been announced. They are trying to work on three channels – the banking deposit side, the ECB side, and the FPI debt side. The FDI regime in India is quite liberal already so there is not much to be done over there,” Barclays Managing Director and Chief Economist Rahul Bajoria told Business Standard.

“From a fundamental standpoint, the rupee has a problem of mismatches in the current account and the capital account. The current account deficit is pretty sticky and it is likely to remain sticky over the course of the next 3 to 6 months, whereas capital flows have been negative. It looks like, as a result of this announcement, some of that gap will get breached.”

Standard Chartered Bank’s foreign exchange team has a forecast of 79 per US dollar for the rupee by the end of September but sees a risk of the local currency overshooting over the near term, with a target of 80.50 per dollar, the bank’s Head of Economic Research South Asia, Anubhuti Sahay, said.

Pulling out all the stops
 

Measures announced by RBI

• Incremental NRE, FCNR (B) deposits exempted from CRR/SLR till Nov 4
• Banks allowed to raise NRE, FCNR (B) deposits without reference to regulations on interest rates
• FPI investment norms regarding govt bonds relaxed; new G-Sec issuances of 7-yr and 14-yr maturity eligible for Fully Accessible Route
• Norms eased on residual maturity for FPI investments in govt and corporate debt
• ECB: Limit under the automatic route increased from $750 mn to $1.5 bn. All-in cost ceiling raised by 100 bps

RBI on economy

• India’s growth prospects remain strong
• CAD is modest; capital flows barring portfolio investments remain stable
• Adequate level of reserves provides a buffer against external shocks