RBI measures to increase forex

RBI measures to increase forex

Subject: Economy

Context:

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.

Details:

• The measures aimed at capital inflows and thus, increasing the forex reserves of India.
• Various measures:
  • RBI has allowed banks temporarily till October 2022 to raise fresh Foreign Currency Non-Resident Bank-FCNR(B) and Non-Resident External (NRE) deposits without reference to the current regulations on interest rates.
    • Currently, interest rates on FCNR(B) deposits are subject to ceilings of overnight Alternative Reference Rate (ARR).In the case of NRE deposits, interest rates should not be higher than those offered by the banks on comparable domestic rupee term deposits.
  • FPIs in government securities and corporate debt made till October 31, 2022, will be exempted from the short-term limit. Currently, not more than 30 percent of investments each in government securities and corporate bonds can have a residual maturity of less than one year.
  • FPIs can invest in corporate money market instruments like commercial paper and non-convertible debentures with an original maturity of up to one year till October 2022.
  • 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. Presently, they can invest in government securities (G-Secs) with 5-year, 10-year and 30-year tenors only.
  • The RBI has doubled the limit under the automatic route for External Commercial Borrowings ECBs from $750 million per financial year to $1.5 billion.
  • RBI has decided that category one banks can utilise overseas foreign currency borrowing (OFCBs) for lending in foreign currency to entities for a wider set of end-use purposes, subject to the negative list set out for external commercial borrowings (ECBs).
  • RBI has exempted banks from Cash Reserve Ratio and Statutory Liquidity Ratio on all Foreign Currency Non-Resident (Bank) and Non-Resident (External) Rupee term deposits.

Concept:

RBI Forex management:

• The Reserve Bank of India, is the custodian of the country’s foreign exchange reserves and is vested with the responsibility of managing their investment.
• The legal provisions governing management of foreign exchange reserves are laid down in the Reserve Bank of India Act, 1934.
• The basic parameters of the Reserve Bank’s policies for foreign exchange reserves management are safety, liquidity and returns. 
• The Reserve Bank of India Act permits the Reserve Bank to invest the reserves in the following types of instruments:
  • Deposits with Bank for International Settlements and other central banks
  • Deposits with foreign commercial banks
  • Debt instruments representing sovereign or sovereign-guaranteed liability of not more than 10 years of residual maturity
  • Other instruments and institutions as approved by the Central Board of the Reserve Bank in accordance with the provisions of the Act
  • Certain types of derivatives

External Commercial Borrowings (ECB)

It refers to the borrowing by an eligible resident entity from outside India in accordance with the framework decided by the Reserve Bank of India in consultation with the Government of India.

External Commercial Borrowings can be availed through:

•  Automatic Route-Through Authorized Dealers, AD Category -I banks;
• Approval Route-Perspective borrower should send its proposal for ECB to RBI through AD-Category-I bank for examination.