As Rupee Continues to Fall, What RBI is Doing to Revive the Currency
The Indian Rupee continues to show weakness against the US Dollar and hit a record high of Rs 79.38 on Thursday. According to analysts, the rupee will continue to lose value in the coming months and will pass the psychological barrier of Rs 80 against the dollar.
There are several factors behind the Indian currency’s freefall and the government had previously said it was monitoring the situation closely.
That said, the Reserve Bank of India (RBI) has now come to the rescue of the Rupee with the announcement of several measures.
Let’s take a look at the actions taken by the Indian central bank to halt the fall of the rupee.
Why is the rupee falling?
High crude oil prices, a strong dollar abroad, and large outflows of foreign funds from domestic markets are among the reasons for the rupee’s fall.
Foreign institutional investors (FIIs) have sold shares worth $28.4 billion so far this year. The rupee has depreciated more than 6% against the dollar so far this calendar year.
What was RBI’s response?
On June 24, RBI Deputy Governor Michael Patra said that the central bank would continue to support the stability of the rupee and would not allow any sharp fall in the rupee against the dollar.
According to reports, the central bank sold dollars last week between 78.97 and 78.98 per US dollar and significantly increased its foreign exchange reserves to protect the rupee from rapid devaluation.
On Wednesday, the RBI further liberalized standards to boost foreign exchange inflows, including doubling the borrowing limit under the ECB route, amid the rupee’s plunge against the US dollar.
More foreign investment in international currencies in the country would mean more demand for the rupee in exchange for buying Indian assets denominated in the national currency.
“In order to further diversify and broaden sources of foreign exchange funding to dampen volatility and mitigate global spillovers,” the central bank said it decided to take five steps to improve foreign exchange inflows while ensuring overall macroeconomic and financial stability.
The measures include easing REIT investment standards in the debt market and increasing the limit on external commercial borrowing (ECB) under the automatic route, among others.
Here is an overview of the measures taken by the RBI:
Increase in ECB limits
Under the ECB’s automatic lane, companies and other entities are allowed to borrow in foreign currencies with an aggregate limit of $750 million. It has now been decided to increase the automatic lane limit by $750 million or its equivalent per fiscal year to $1.5 billion.
Expanding the scope of foreign currency lending by banks
Currently, foreign currency loans from licensed Tier I brokers, which are mostly domestic and foreign banks, are permitted to borrow foreign currencies abroad up to a limit of 100% of their Tier 1 capital or $10 million, whichever is greater. .
There is, however, a restriction on the end use of the funds solely for export financing.
The central bank has now ruled that banks can use these funds to lend in foreign currency to entities for broader end-use purposes, subject to the established negative list for external commercial borrowing (ECB).
Debt Investment REIT
The RBI has further eased investment by REITs in government securities and corporate bonds.
In the G-sec segment, the RBI has increased the choice of 5-year, 10-year and 30-year REITs to all new issues of 7-year and 14-year G-Secs.
There is also a 30% investment limit in short-term G-sec paper and corporate bonds less than one year old.
Currently, REITs are only permitted to invest in corporate debt securities with a residual maturity of at least one year. It has been decided that REITs will benefit from a limited window until October 31, 2022, during which they can invest in corporate money market instruments, namely commercial paper and non-convertible debentures of an initial maturity of up to one year.
Exemption from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on additional FCNR(B) and NRE Term Deposits
Currently, banks are required to include all foreign currency non-residents (banks) [FCNR(B)] and Non-Resident (NRE) Rupee (External) Deposit Liabilities to calculate Net Demand and Time Liabilities (NDTL) for maintaining statutory requirements such as CRR and SLR.
The RBI has said that from the reporting fortnight commencing July 30, 2022, additional FCNR(B) and NRE filings with a baseline date of July 1, 2022 will be exempt from maintaining CRR and SLR. This exemption will be available for deposits until November 4, 2022. Transfers from Non-Resident (Ordinary) (NRO) accounts to NRE accounts will not qualify for the exemption.
Interest rate on FCNR(B) and NRE deposits
RBI temporarily allowed banks to raise new foreign currency for non-resident banks [FCNR(B)] and NRE deposits without reference to current interest rate regulations, effective July 7, 2022. This relaxation will be available for the period up to October 31, 2022.