Bombay : The Reserve Bank of India has announced a series of measures to stimulate foreign exchange inflows in order to stop the fall of the rupee against the dollar.

Measures include doubling annual overseas borrowing limits for businesses to $1.5 billion and temporarily removing interest rate caps for banks to attract deposits from non-resident Indians, RBI said in a statement Wednesday.

The central bank has also relaxed rules allowing foreign investors to invest in public and corporate debt in India.

The rupee has come under severe pressure, hitting a series of lows in recent weeks, as foreign portfolio investors withdrew their investments from India, and the country’s trade deficit gradually widened to a record high. in June due to higher import costs for crude, gold and other commodities.

Economists have estimated that India’s current account deficit, a large measure of the country’s trade and financial flows with other countries, is expected to widen to more than 3% of GDP this fiscal year, nearly double that of the previous year.

RBI said the latest measures would help diversify and broaden forex funding sources and reduce currency volatility. “While the current account deficit remains modest, capital flows, with the exception of portfolio investment, remain stable, and an adequate level of reserves provides a buffer against external shocks. The rupee has depreciated 4.1% against the dollar in the current financial year (to July 5), which is modest compared to other EMEs (emerging market economies) and even major advanced economies,” the RBI said. India’s foreign exchange reserves stood at $593.3 billion as of June 24.

Traders expect the latest news to support the rupiah, which they previously expected to slide to 80 against the dollar as early as this month.

“The markets were expecting the rupiah to hit 80 in no time, but it won’t happen. The rupiah should benefit from these announcements,” said Paresh Nayar, head of forex and fixed income, First Rand Bank.

Among other measures taken by the RBI to attract foreign inflows, it exempted banks from maintaining the cash reserve ratio and statutory liquidity ratio on additional term deposits in foreign currency and rupees raised from non-Indians. residents between July 1 and November 4. Additionally, RBI removed the cap on interest rates on such deposits between July 7 and October 31.

Currently, foreign currency deposits with a maturity of 1 to 3 years are priced at 250 basis points above the so-called alternative reference rate, while deposits with a maturity of 3 to 5 years are priced at 350 basis points above. above the reference rate. The bankers said the relaxations will not only reduce the cost of funds for banks, but also allow non-residents to earn better returns, attracting foreign funds into the domestic banking system.

“The measures are fundamentally good for attracting capital, in our view, but may take some time to have an impact as the pressure on the rupee comes mainly from the persistently large current account deficit, not just capital outflows. In addition, the government’s previously announced additional export taxes on petroleum and petroleum products, increased import duties on gold, and the levy on domestic petroleum production are expected to help improve the sentiment, but the fundamental pressure on FX could linger for some time, perhaps until there is a significant correction in commodity prices,” said Rahul Bajoria, India’s chief economist. , Barclays Bank.

By easing the Foreign Portfolio Investment (FPI) standards, the RBI allowed new issuances of 7- and 14-year government securities under the Fully Accessible Pathway (FAR). Currently, only 5-year-old, 10-year-old and 30-year-old G-secs are designated under FAR. The REIT’s investment in bonds under FAR has no limits, unlike other securities.

RBI has also relaxed standards on the residual maturity of REIT investments in government and corporate debt. Investments by REITs in such bonds made through October 31 are exempt from a short-term limit, whereby no more than 30% of investments can have a residual maturity of less than one year. The central bank also provided a window until Oct. 31 for REITs to purchase money market instruments such as commercial paper with an original maturity of up to one year.

“Investor demand may increase for Treasury bills, commercial paper and bonds with maturities up to one year, although the supply of CP and short-term bonds has been reduced. This would mean that Treasury bond yields could fall. Short-term rates rose sharply in last month’s post-repo rate hikes and market prices in future repo hikes. Today’s RBI initiative can help depress short-term yields if it appeals to REITs and other investor segments,” said Venkatakrishnan Srinivasan, Founder of Rockfort Fincap.

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