Decoding: Liberalisation of Forex Inflows (Almus Risk Consulting)

Liberalization of Forex Inflows

(RBI Circular dated July 6th, 2022)

The measures taken to enhance foreign inflows to ensure macroeconomic stability:

Relaxation in liquidity requirements:

1. Deposits by NRIs and foreign participants are added to the computation of Net Demand and Time Liabilities (NDTL) which is used to maintain CRR and SLR. [If I provide the bank with $100, x% of this deposit has to be maintained as Cash and SLR and only $100-x% can be used for lending]
2. All new deposits from the reference date of July 30th, 2022, are exempt from such requirements. [Essentially it means $100 deposited can be used in its entirety for lending and investment]

Impact: This would ideally enhance the total liquidity available with banks to lend

Interest Rates on FCNR and NRE deposits:

Current Rates:

1. Period 1 to 3 years: ARR+250 basis
2. Period 3 to 5 years: ARR+350 basis
3. ARR: alternate reference rate which has been identified as a replacement of the benchmark reference rate LIBOR. [SOFR, SONIA, TONA, ESTER]
4. NRE deposits: Interest rates offered shall not be higher than those offered by banks on comparable rupee term deposits.

It has been decided to allow banks to raise such deposits without any restrictions on rates on deposits.

FPI investment in Debt:

Medium Term Framework (MTF)

1. Investment in corporate and government debt is subject to a limit of 30% investment in each security with residual maturity under 1 year. It has been decided that such investments will be exempted from this short-term limit.
2. FPIs could only invest in corporate debt instruments with a maturity of at least one year. It has been decided that up to October 31st, 2022, FPIs will be exempted from these requirements and can also invest in CPs and NCDs with an original maturity of one year.

Impact: This will make money market instruments more accessible to FPIs enabling inflows

Fully Accessible Route (FAR)

1. Specified Securities: Central Government 5,10 and 30-year papers.
2. It has been decided to include new issuances of 7-year and 14-year tenors as part of specified securities under FAR

Impact: This provides FPIs with more investment avenues with the intention of bringing in more inflows?

Foreign Currency lending by banks:

1. Cat-1 banks can undertake foreign borrowing which was earlier used only for purposes of export finance. It has now been decided that these funds can be used to lend to a wider set of end purposes except the negative end-use list as per the ECB regulations.

Impact: Relaxation of such end-use will allow banks to borrow and lend freely

1. Under ECB regulations, borrowing limits under the automatic route are raised to USD 1.5 billion from USD 750 million. The all-in-cost ceiling is increased by 100 basis.

Impact: Such relaxation allows funds to be borrowed at a higher cost. This would allow lower-rated companies to raise funds abroad

Prepared By

Swaraj Rajagopal,

Analyst- Treasury Markets,

Almus Risk Consulting LLP.