Measures to Boost Forex Inflows

• 18 Jul 2022

For Prelims: Forex, CRR, SLR, ECB, RBI

For Mains: Measures to Boost Forex Inflows

Why in News?

Recently, Reserve Bank of India (RBI) has undertaken measures to enhance forex inflows, amid Depreciation of Indian rupee.

Why has the RBI taken Measures to Boost Forex?

• The rupee has depreciated by 4.1 % against the US dollar during the current financial year (2022-23) so far amid the ongoing geopolitical tensions.
  • Indian Rupee has depreciated 4.1 % to 79.30 against the US dollar in the current financial year (FY 2022-23).
• Foreign Portfolio Investors (FPIs) have pulled out Rs 2.32 lakh crore in six months.
• India's forex reserves, over the last 9 months, have decreased by USD 50 billion to USD 593.3 billion.

What is a Forex Reserve?

• About:
  • Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies, which can include bonds, treasury bills and other government securities.
  • Most foreign exchange reserves are held in US dollars.
• Components:
  • Foreign Currency Assets
  • Gold reserves
  • Special Drawing Rights
  • Reserve Tranche Position with the International Monetary Fund (IMF).

What are the Measures?

• FPI Investment in Debt:
  • Foreign Portfolio Investors (FPIs) can invest in government securities and corporate bonds.
  • It has also sought to boost debt portfolio inflows by widening the basket of securities available to FPIs.
    • FPI is a route for foreign investment in India. It includes investments in shares of listed Indian Company, Non-Convertible Debentures, units of domestic MF (Mutual Fund), Government Securities, Security Receipts, etc.
• Higher Returns:
  • The RBI has allowed banks to give higher returns on foreign currency deposits on which they will not have to maintain any reserves.
    • Interest rates should not be higher than those offered by the banks on comparable domestic rupee term deposits.
• Relaxation Under ECBs:
  • Rules governing External Commercial Borrowing (ECB) for corporates have been relaxed, with the automatic route being doubled to USD 1.5 billion and the cap on borrowing costs raised by 1% point.
    • ECBs are loans in India made by non-resident lenders in foreign currency to Indian borrowers. Used to facilitate access to foreign money by Indian corporations and PSUs (public sector undertakings).
• Export Taxes:
  • The Union government has also increased export taxes on oil and petroleum products and import duty on gold, to control the widening Current Account Deficit.
• Exemption on FCNR(B) and NRE Deposits:
  • Non-Resident Indians (NRIs) will get high returns for bringing foreign exchange into India into FCNR(B), and NRE deposits as the cap on rates has been removed for fresh deposits.
    • FCNR(B) are foreign currency non-resident deposits (denominated in foreign currency), while NRE deposits are non-resident external deposits.

What is External Commercial Borrowings?

• About:
  • ECBs is a loan availed by an Indian entity from a non-resident lender with a minimum average maturity.
  • Most of these loans are provided by foreign commercial banks buyers’ credit, suppliers’ credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds etc.
• Advantages:
  • ECBs provide opportunity to borrow large volume of funds.
  • The funds are available for relatively long term.
  • Interest rate are also lower compared to domestic funds.
  • ECBs are in the form of foreign currencies. Hence, they enable the corporate to have foreign currency to meet the import of machineries etc.

Source: IE