The Reserve Bank of India (RBI) has recently taken steps to increase forex inflows due to the depreciation of the Indian rupee. The depreciation of 4.1 % against the US dollar in the current financial year (2022-23) has been a consequence of ongoing geopolitical tensions. With an outflow of Rs 2.32 lakh crore by Foreign Portfolio Investors (FPIs) over six months and a decrease in Forex reserves by USD 50 billion, the RBI’s measures are being keenly observed.
Understanding Forex Reserves
Forex reserves are assets, primarily held in US dollars, maintained by a central bank. These assets can consist of various elements including foreign currency assets, gold reserves, special drawing rights, and reserve tranche position with the International Monetary Fund (IMF).
Introducing Boosting Measures
To counteract the current issue, RBI has implemented various measures. FPIs are now permitted to invest in government securities and corporate bonds, thereby expanding the range of securities available for potential investment. In addition, the RBI has allowed banks to offer higher returns on foreign currency deposits without maintaining any reserves, although these interest rates should not surpass those provided on domestic rupee term deposits.
Foreign Investment Relaxation and Higher Returns
Regulations governing External Commercial Borrowing (ECB) for corporations have been eased by the RBI. A prominent change includes the automatic route limit being raised to USD 1.5 billion and an increase in the cap on borrowing costs by 1%. This makes ECBs—loans in foreign currency from non-resident lenders—a more attractive and accessible option for Indian corporations and public sector undertakings.
Tax Changes and Deposit Exemptions
The Union government has increased export taxes on oil and petroleum products and import duty on gold to manage the growing Current Account Deficit. Additionally, Non-Resident Indians can earn higher returns through FCNR(B) and NRE deposits following a removal of rate caps on fresh deposits. This makes FCNR(B) – foreign currency non-resident deposits – and NRE deposits more attractive for Indians residing overseas.
Understanding External Commercial Borrowings
ECBs are loans obtained by an Indian entity from a non-resident lender and typically have a long-term maturity duration. These loans are often supplied by foreign commercial banks in the form of buyers’ credit, suppliers’ credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds etc. ECBs allow businesses to borrow large volumes of funds at interest rates lower than domestic rates and in foreign currencies. This measure proves particularly helpful for corporations that need foreign currency to import machinery and other goods.