A day after the Reserve Bank of India (RBI) liberalised rules to increase forex inflows to ensure overall macroeconomic and financial stability, the rupee depreciated 18 paise to 79.25 against the U.S. dollar. The U.S. dollar gained amid speculations that another key lending rate hike by the Federal Reserve is on the cards this month. Yesterday, the rupee had closed at 78.94 against the U.S. dollar. The Indian rupee had fallen 42 paise to hit an all-time low of 79.37 against the US dollar on Tuesday i.e. July 5. The domestic currency depreciated by over 4% to hit a record low against the U.S. dollar during the current fiscal year.
The local currency opened at 79.06 against the greenback at the interbank forex exchange and witnessed an intra-day high of 79.37 and a low of 78.90. Foreign brokerage Nomura expects the Indian rupee to fall to 82 against the dollar by the third quarter of 2022 amid unrelenting capital outflows and a widening trade deficit. Nomura expects the local currency to rise to 81 in the fourth quarter. India’s current account deficit is expected to further widen to 3.3% in the financial year 2022-23 from 1.2% in FY22, Nomura says.
The Reserve Bank has said that it's closely and continuously monitoring the liquidity conditions in the forex market. It says it has stepped in as needed in all its segments to alleviate dollar tightness to ensure orderly market functioning.
"To further diversify and expand the sources of forex funding to mitigate volatility and dampen global spillovers, it has been decided to undertake measures listed below to enhance forex inflows while ensuring overall macroeconomic and financial stability," says the RBI.
The measures taken by the central bank are exemption from cash reserve ratio and statutory liquidity ratio on incremental FCNR(B) and NRE term deposits, interest rates on FCNR(B) and NRE deposits, FPI investment in debt, foreign currency lending by AD Cat-I banks, and external commercial borrowings (ECBs).
On ECBs, the RBI says it has temporarily increased the limit under the automatic route from $750 million or its equivalent per financial year to $1.5 billion. "The all-in-cost ceiling under the ECB framework is also being raised by 100 basis points, subject to the borrower being of investment-grade rating. The above dispensations are available up to December 31, 2022," says the central bank.
So far, under the automatic ECB route, eligible borrowers were allowed to raise funds through their AD banks, without approaching the RBI. This is applicable as long as the borrowing conforms with the prudential parameters of the ECB framework such as the all-in-cost ceiling, minimum maturity requirements and the overall dynamic ceiling.
The central bank also says that investments by FPIs in government securities and corporate debt made till October 31, 2022, will be exempted from this short-term limit i.e. not more than 30% of investments each in G-secs and corporate bonds can have a residual maturity of less than one year. FPIs will also be provided with a limited window till October 31, 2022, during which they can invest in corporate money market instruments viz., commercial paper and non-convertible debentures with an original maturity of up to one year.