RBI Takes Steps to Attract Dollar Inflows, Ease Foreigh Exchange Woes

Strategic Insights -

The Reserve Bank of India has taken measures to ease the flow of foreign investments, relax terms on foreign currency deposits, and increase the eligibility for foreign portfolio investors in debt securities. The central bank aims to stem the outflow of portfolio funds, conserve foreign exchange reserves, and alleviate dollar tightness in the forex market. The RBI has doubled the threshold on External Commercial Borrowing (ECB) and created additional space for non-bank lenders to tap the offshore loan market.

Key Takeaways:

  • The RBI has eased several curbs on the flow of foreign investments, including the terms governing the rates of interest offered to foreign currency deposits by overseas Indians.
  • The threshold on External Commercial Borrowing (ECB) under the automatic route has been doubled from the previous level.
  • Foreign portfolio investors (FPI) in debt securities will now have a wider choice of eligible instruments, with the relaxation of curbs on maturities to draw more short-term funds.
  • The RBI has permitted banks to garner FCNR (B) and NRE deposits from the Indian diaspora without any interest rate cap, and also allowed banks to expand the usage of overseas foreign currency borrowings (OFCB) for a wider set of end-use purposes.
  • The Fully Accessible Route, a bespoke channel for debt investment by overseas investors, will expand its universe of government securities to include 7-year and 14-year papers.
  • The RBI has also created additional space for non-bank lenders tapping the offshore loan market, raising the highest ceiling to $1.5 billion from $750 million now.

Statistics:

  • The rupee has lost 6.26% this calendar year to the dollar due to outflows.
  • Foreign portfolio investors have withdrawn a record $30.34 billion until now this year.
  • The Reserve Bank's foreign exchange reserves shrank nearly $50 billion from the peak of $642.45 billion reported in the week ended September 3 last year.
  • The US Dollar Index, or DXY, is up 11.6% this year.
  • The RBI permitted banks to garner FCNR (B) and NRE deposits from the Indian diaspora without any interest rate cap until October 31 and November 4, respectively.
  • The RBI also allowed banks to expand the usage of overseas foreign currency borrowings (OFCB) until December 31.

Sources:

  • RBI statement
  • DBS Bank India
  • Barclays
  • Marketwatch
  • Times of India