7/22/22, 12:11 PM How the RBI is trying to bring in more dollars and arrest rupee's slide - Times of India

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How the RBI is trying to bring in more dollars and arrest

rupee's slide
TIMESOFINDIA.COM | Jul 7, 2022, 10.21 AM IST

NEW DELHI: The Reserve Bank of India has announced a series of steps
to arrest the rupee’s slide against the dollar and boost foreign exchange
inflows. The rupee has depreciated by 4.1 per cent during the current
financial year so far (upto July 5). On Wednesday it closed at 79.30.

The measures include easing norms for foreign portfolio investment in

debt market, increasing the External Commercial Borrowing (ECB) limit
under the automatic route from $750 million or its equivalent per financial
year to $1.5 billion as well as temporarily abolishing interest-rate caps for
banks to attract deposits from non-resident Indians.

Here are the steps taken by the RBI

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1. Exemption from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on Incremental FCNR(B) and NRE Term Deposits:
RBI has allowed banks to give higher returns on foreign currency deposits on which they will not have to maintain any reserves.

Among steps taken by RBI to attract foreign flows, it exempted banks from maintaining cash reserve ratio and statutory liquidity
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7/22/22, 12:11 PM How the RBI is trying to bring in more dollars and arrest rupee's slide - Times of India

ratio on incremental foreign currency and rupee-denominated term deposits raised from non-resident Indians between 1 July
and 4 November, 2022.

The RBI also removed the ceiling on interest rates on these deposits between 7 July and 31 October. This implies that Non-
resident Indians will get higher returns for bringing foreign exchange into India into FCNR(B), and NRE deposits as the cap on
rates have been removed for fresh deposits. This relaxation will be availabled up to October 31, 2022.

FCNR(B) are foreign currency non-resident deposits ( denominated in foreign currency), while NRE deposits are non-resident
external deposits.

However, transfers from Non-Resident (Ordinary) (NRO) accounts to NRE accounts shall not qualify for the relaxation.

These relaxations will allow non-residents to get better returns, attracting foreign funds to the domestic banking system.

Currently, interest rates on FCNR(B) deposits are subject to ceilings of overnight Alternative Reference Rate (ARR) for the
respective currency/ swap plus 250 basis points for deposits of 1-3 years maturity and overnight ARR plus 350 basis points for
deposits of 3-5 years maturity. In the case of NRE deposits, interest rates should not be higher than those offered by the banks
on comparable domestic rupee term deposits.

"In September 2013, the measure on NRI deposits was made attractive with a subsidized fixed swap rate window with the RBI.
Presently, with a turn in the global interest rates, deposits in India were relatively less attractive for NRIs. This measure helps in
managing the narrowing rate differential and making NRI deposits more attractive," said Upasna Bhardwaj, chief economist at
Kotak.

2. FPI Investment in Debt: The central bank also eased rules for foreign investors to invest in government and corporate debt in
India.

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7/22/22, 12:11 PM How the RBI is trying to bring in more dollars and arrest rupee's slide - Times of India

Foreign Portfolio Investors (FPIs) can invest in government securities and corporate bonds through three channels: (a) the
Medium-Term Framework (MTF) introduced in October 2015; (b) the Voluntary Retention Route (VRR) introduced in March 2019;
and (c) the Fully Accessible Route (FAR) introduced in April 2020. In order to encourage foreign portfolio investment, the
following changes in debt flows are being put in place:

At present, FPI investment in government and corporate debt under the MTF is subject to a short term limit viz., not more than
30 per cent of investments each in government securities and corporate bonds can have a residual maturity of less than one
year. However, the RBI has now exempted such investments by FPIs in government securities and corporate debt made till
October 31, 2022 from this short term limit.

Further, FPIs will be provided with a limited window till October 31, 2022, during which they can invest in corporate money
market instruments like commercial paper and non-convertible debentures with an original maturity of up to one year. FPIs can
continue to stay invested in these instruments till their maturity or sale. These investments will not be included for reckoning
the short-term limit for investments in corporate securities.

Expanding the investible space of FAR securities to 7-year and 14-year tenors could attract incremental flows over the medium-
term even though in the near-term the adverse global conditions will likely continue to impede inflows, noted Bhardwaj.

3. External Commercial Borrowings (ECBs)

The RBI has decided to temporarily increase the limit under the automatic route for external commercial borrowing (ECB) from
US$ 750 million or its equivalent per financial year to US$ 1.5 billion. The all-in cost ceiling under the ECB framework is also
being raised by 100 basis points, subject to the borrower being of investment grade rating. The above dispensations are
available up to December 31, 2022.

The higher all-in-cost will ease the constraints faced by high-yield borrowers, especially with the rapid turn in global monetary
policy cycle.

4. Foreign currency lending

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In another measure, the 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). The measure is expected to facilitate foreign currency borrowing by a larger set of borrowers
who may find it difficult to directly access overseas markets.

In September 2013, the banks were allowed to borrow overseas in foreign currency up to 100% of their unimpaired Tier-1
capital along which could be swapped with RBI at a concession rate. The RBI now has expanded the use of such borrowings
for foreign currency lending (from only export finance) to all segments except for a negative list set out for ECBs. " In 2013 the
attractive swap window had helped garnered, as per unconfirmed media reports, more than US$5 billion," said Bhardwaj.

Why the rupee has come under pressure

The rupee has come under severe pressure as foreign portfolio investors pulled out their investments from India, and the
country’s current account deficit widened to a record in June because of rising import costs of crude, gold and other
commodities. "The global outlook is clouded by recession risks. Consequently, high risk aversion has gripped financial markets,
producing surges of volatility, sell-offs of risk assets and large spillovers, including flights to safety and safe haven demand for
the US dollar. As a result, emerging market economies (EMEs) are facing retrenchment of portfolio flows and persistent
downward pressures on their currencies," noted the RBI in a statement.

A weak rupee impacts India's balance of trade and inflation

A weak rupee directly impacts India’s trade balance and inflation through higher cost of imports. "Since February this year, a
steeper decline in rupee coupled with the sharp rise in the commodity prices has led to a surge in India’s import bill. While a
depreciating rupee also benefits exports, this is clearly being offset by the rise in the import bill. The trade balance has
worsened from $73 billion in the first half of 2021, to $124 billion in the first half of 2022. Meanwhile, costlier imports are
pushing up inflation domestically. In the consumer price inflation, this is directly seeping in through higher prices of fuel and
imported food components such as edible oils, and indirectly via higher cost of inputs which manufacturers are rapidly passing
on. Manufacturers, meanwhile, have been facing a higher pressure from imported inflation. Our analysis suggests that import
price inflation accounts for about 60% of the wholesale price inflation today, compared to 28% in the pre-pandemic period,"
said Dipti Deshpande, Principal Economist, CRISIL Ltd.
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RBI move signlas intent in addressing dollar shortage

" The RBI’s measures to attract forex flows through the banks, corporates, and debt investors signal a stronger intent in
addressing the current dollar shortage. The FX reserves remain at a healthy level and incremental flows from the measures aim
at bolstering it further. While we are cautious on the quantum of incremental flows, we see these measures as being
preemptive in capping any sharp depreciation bias and reducing volatility in the INR. We continue to see USD-INR within 78.5-
80 in the near term. We note that the fundamentals continue to weigh on the INR. However, the RBI will endeavor to ensure an
orderly depreciation," said Upasna Bhardwaj, chief economist at Kotak.

RBI move aims to bring in more dollars

" It’s a two-pronged strategy whereby the central bank has attempted to cause impediments to the flight of FPI on one hand
and bring in more dollars with attractive interest rates on the other. Apparently, RBI is trying to cover any possible shortfall in
meeting forex commitments in a short term. A short-term policy measure for improving Forex Liquidity, may not be adequate to
attract funds, particularly on the ECB front. Hence, a broader perspective could have been better even for such a short-term
arrangement," said Jyoti Prakash Gadia, Managing Director, Resurgent India.

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