The Reserve Bank of India (RBI) has announced a slew of temporary measures aimed at boosting foreign exchange inflows, including a doubling in the overseas borrowing limit for corporates and removal of interest rate ceilings for NRIs’ foreign currency deposits.
- The move comes as persistent capital outflows and a widening trade deficit have led to a sharp depreciation in the Indian rupee to new lows against the dollar.
- In order to further diversify and expand the sources of forex funding so as to mitigate volatility and dampen global spillovers, it has been decided to undertake measures to enhance forex inflows while ensuring overall macroeconomic and financial stability.
- As part of the measures, banks have been exempted from maintaining the stipulated Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on incremental FCNR(B) and NRE term deposits mobilised up to November 4.
- It also freed banks to temporarily raise fresh FCNR(B) and NRE deposits without reference to extant regulations on interest rates, with effect from July 7 and up to October 31, 2022.
- To encourage foreign portfolio investment into debt, the RBI said the choice of government bonds available for investment under the fully accessible route (FAR) would be widened, with all new issuances of G-Secs of 7-year and 14-year tenors, including the current issuances of 7.10% GS 2029 and 7.54% GS 2036, designated as specified securities.
- The RBI also temporarily doubled the annual limit for External Commercial Borrowings (ECB) to $1.5 billion or its equivalent.
Why is the Indian Rupee depreciating?
- In a free-market economy, the exchange rate is decided by the supply and demand for rupees and dollars. In case, Indians demand more dollars in comparison to Americans demanding the rupee, the exchange rate will “fall” or “weaken” for rupee and “rise” or “strengthen” for dollar.
- U.S. Federal Bank rate Hike (Dollar moving out of India) —
- Interest rate hike by the Fed results in foreign Institutional Investors (FIIs) pulling out from Indian Stock Markets, as Indian markets would be far less attractive to them.
- An increase in interest rates would result in a weaker Indian Rupee in comparison to the USD.
- Rising Import Costs —
- The Brent crude-oil prices have reached to 14-year highs.
- India meets 80 per cent of her crude oil requirements through imports.
- Hence, this leads to rise in import costs which, in turn, weakens the rupee. This is because India’s demand for dollars would have increased while global demand for the rupee remained unchanged.
- Rising Current Account Deficit —
- A current account deficit occurs when the total value of goods and services a country imports exceeds the total value of goods and services it exports.
- The current account deficit for India in the fiscal year 2021-22 has come in at 1.2%.
- A huge current account gap could make the rupee depreciate further in the absence of meaningful intervention from the central bank.