What’s the story
The Reserve Bank of India (RBI) has announced five major measures to attract foreign capital and bolster the Indian rupee.
The move comes in light of the currency’s recent struggles due to geopolitical tensions in West Asia, rising crude oil prices, and foreign portfolio investor (FPI)-related dollar outflows from Indian equity markets.
The measures are aimed at improving dollar liquidity in the financial system and making Indian debt markets more accessible for overseas investors.
Sovereign bond market opened for foreign investment
The RBI has expanded the universe of ‘specified securities’ under the Fully Accessible Route (FAR) to include all new issuances of 15-, 30-, and 40-year tenor Government Securities.
This move is expected to make Indian government bonds more attractive to global investors as FAR category securities are already part of three major global bond indexes.
The central bank also removed investment limits on other government securities, further opening up the sovereign bond market for foreign capital.
Relaxation of investment limits for NRIs, OCI’s
In a bid to boost foreign inflows, the RBI has relaxed investment limits for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs).
The central bank said these limits will be increased and extended to all individual Persons Resident Outside India (PROIs).
This move could encourage greater participation from the Indian diaspora and overseas investors in domestic financial markets.
Introduction of concessional foreign exchange swap facility
The RBI has also introduced a concessional foreign exchange swap facility, available until September 30.
The facility is aimed at incentivizing banks and market participants to bring foreign currency into India by reducing the cost of dollar-rupee conversion.
Such swap arrangements have been previously used by the central bank during periods of foreign exchange stress to boost dollar liquidity in the domestic market.
Encouraging external commercial borrowings (ECBs)
The RBI has also decided to encourage external commercial borrowings (ECBs), especially by public sector undertakings.
These borrowings allow Indian companies to raise funds from overseas markets.
By making such borrowings more attractive, the central bank hopes to bring additional foreign currency into the country at a time when external financing conditions have become more challenging.
Special FCNR(B) facility for banks
The RBI has also announced a special facility until September 30, allowing banks to raise three-to-five-year Foreign Currency Non-Resident Bank (FCNR(B)) deposits with full hedging cost support.
These deposits are an important source of foreign currency inflows as they allow Indians living abroad to maintain fixed deposits in foreign currencies.
Historically, special FCNR schemes have been used by the RBI during periods of currency volatility to attract dollars into the banking system.
