Rise in ECB limit under Automatic Route

July 8, 2022

On July 6, 2022, the Reserve Bank of India (RBI) has liberalised the norms further in order to increase foreign exchange inflows.

Key Facts

The central bank has also increased the borrowing limit for ECB under automatic route by two times.
This decision was taken amid falling value of rupees against US dollars. Rupee has depreciated by 4.1% so far against US dollar in current financial year.
Liberalised norms were required to alleviate dollar tightness, in a bid to ensure orderly market functioning.

Measures taken by RBI to boost forex inflows

The central bank has undertaken five measures to boost the inflows of forex in India. These measures would also diversify and expand forex funding sources to do away with the volatility and dampen global spill-overs. The measures include:

1) Exemption from CRR and SLR on NRE Term Deposits and Incremental FCNR(B)

Currently, banks are mandated to include all Foreign Currency Non-Resident (Bank) [FCNR(B)] as well as Non-Resident (External) Rupee (NRE) deposit liabilities for the purpose of computation of Net Demand & Time Liabilities (NDTL) in order to maintain the cash reserve ratio (CRR) and statutory liquidity ration (SLR). Now RBI has exempted the incremental FCNR(B) and NRE deposits from maintenance of CRR and SLR.

2) Interest Rates on FCNR(B) and NRE Deposits

Currently, interest rates on deposits of FCNR(B) are dependent on ceilings of Overnight Alternative Reference Rate (ARR). As per revised norms, interest rates will not be more than what is offered by banks on rupee terms deposits, in case of NRE deposits. Banks have been temporarily permitted to raise fresh FCNR(B) and NRE deposits, without referring the extant regulations on interest rates.

3) FPI Investment in Debt

RBI has decided to designate the new issuances of G-Secs of 7-year and 14-year tenors, as specified securities under the FAR. Short term limit of 30 % of the investment in government securities and corporate bonds have been kept on hold for FPIs’ investments till October 31, 2022. FPIs have been allowed to stay invested in these instruments till sale or maturity.