The Reserve Bank of India RBI has acted to encourage dollar inflows into the country because of the steep depreciation of the value of rupee against the US dollar in a short period of time. The RBI has announced a series of measures designed to protect the value of the rupee. Exempt from Cash Reserve Ratio CRR and Statutory Liquidity Ratio SLR on Incremental FCNR B and NRE Term Deposits
FCNR B is a term deposit held in foreign currency, while the NRE Term deposit is held in Indian currency. There is a requirement for the cash reserve ratio CRR at 4.50 per cent and the statutory liquidity ratio SLR at 18 per cent. The banks are discouraged from raising deposits due to higher statutory requirements where the banks earn sub optimal returns. The RBI's move will open up a lending and investment window for banks to deploy deposits at a higher return than in the earlier regulatory regime.
Freeing of interest rate limits on FCNR B and NRE deposits.
The interest on FCNR B and NRE deposits is linked to a global reference rate and additional 250 -- 35 0 basis points. The interest rate cap was temporarily removed by the RBI. This will allow banks to offer a higher interest rate and attract dollar flows.
More options for foreign investors to invest in G-Sec and corporate debt are available.
Foreign portfolio investors FPIs have been allowed to invest in government securities and corporate bonds, according to the RBI. In the G-sec segment, the RBI has increased the options for FPI from 5 year, 10 year and 30 year paper to all new issuances of G-Secs of 7 year and 14 year tenor. There is a 30 per cent investment limit in short term G-sec paper and corporate bonds of less than a year.
It was decided that investments made by FPIs in government securities and corporate debt until October 31, 2022 will be exempt from this short-term limit, states RBI.
FPIs are allowed to invest only in corporate debt instruments with a residual maturity of at least one year. It has been decided that FPIs will be provided with a limited window until October 31, 2022 during which they can invest in corporate money market instruments viz. Commercial paper and non- convertible debentures with an original maturity of up to one year.
Expansion of lending scope for foreign currency lending by banks
Foreign currency lending by category I authorised dealers are allowed to take foreign currency borrowing up to a limit of 100 per cent of their Tier 1 capital or $10 million, whichever is higher. There is a restriction on the end use of funds to export finance. The central bank has now decided that banks can use these funds 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 Under the automatic ECB route the corporate and other entities are allowed to raise foreign currency loans with an overall limit of $750 million. It has been decided to increase the limit on the automatic route from $750 million or its equivalent per financial year to 1.5 billion.