RBI’s measures to boost forex inflow to prevent rupee sliding further
The Reserve Bank of India announced measures to diversify and expand the sources of forex funding with an aim to mitigate volatility and dampen global spillovers. In the current financial year, the Indian Rupee has depreciated 4.1% against the US dollar over 3 months. Foreign Portfolio Investors (FPIs) have pulled out Rs 2.32 lakh crore in the last six months, and $50 billion has being shaved off forex reserves over the last nine months. RBI has come up with a few measures including letting foreign investors invest in short-term corporate debt and allowing the purchase of more government securities under the fully accessible route to curb the outward flow of FPIs.
The measures to boost forex inflows include:
Exemption from Cash Reserve Ratio and Statutory Liquidity Ratio on Incremental FCNR(B) and NRE Term Deposits : Foreign currency non-resident deposits (FCNR(B) and NRE deposits) will be exempt from the maintenance of cash reserve ratio and statutory liquidity ratio. The relaxation will be available for deposits mobilised up to November 04, 2022.
Interest Rates on FCNR(B) and NRE Deposits: Banks will be permitted to raise fresh FCNR (B) and NRE deposits without being subject to current interest rate caps.
FPI Investment in Debt: The central bank said investments by FPIs in government securities and corporate debt made till October 31, 2022, will be exempted from this short-term limit. These will not be reckoned for the short-term limit of one year till maturity or sale of such investments. Further, FPIs will be provided with a limited window till October 31, 2022, during which they can invest in corporate money market instruments like commercial paper and non-convertible debentures with an original maturity of up to one year. FPIs can continue to stay invested in these instruments till their maturity or sale. These investments will not be included for reckoning the short-term limit for investments in corporate securities.
Foreign Currency Lending by Authorised Dealer Category I (AD Cat-I) Banks: AD Cat-I banks can utilise foreign currency borrowing (OFCBs) for lending in foreign currency to entities for a wider set of end-use purposes, subject to the negative list set out for external commercial borrowings (ECBs). This measure is expected to facilitate foreign currency borrowing by a larger set of borrowers who may find it difficult to directly access overseas markets.
External Commercial Borrowings (ECBs): The RBI has now been decided to increase 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 RBI said it has been closely and continuously monitoring the liquidity conditions in the forex market and has stepped in as needed in all segments to alleviate dollar tightness with the objective of ensuring orderly market functioning. RBI highlighted that the global outlook is clouded by recession risks. Consequently, emerging market economies (EMEs) are facing retrenchment of portfolio flows and persistent downward pressures on their currencies caused by high risk aversion in financial markets, producing surges of volatility, sell-offs of risk assets and large spill overs, including flights to safety and safe-haven demand for the US dollar.
RBI’s green signal for India’s largest corporate merger
Reserve Bank of India has approved the merger of HDFC bank with Housing Development Finance Corporation. It would be the largest merger deal in Indian corporate history, creating a financial behemoth with a $169-billion market capitalisation (the second-largest in India) and will be among the 10 most valued banks in the world.
The merger proposal remains subject to various statutory and regulatory approvals, including from the Competition Commission of India (CCI), National Company Law Tribunal (NCLT), other applicable authorities and the respective shareholders and creditors of the companies. Both the stock exchanges, BSE and NSE have approved the proposed merger. The merger is expected to be completed by the second or third quarter of FY24, subject to regulatory approvals.
Once all approvals are in place, HDFC Bank will become a 100% publicly owned institution and existing shareholders of HDFC will own 41% of the bank. The proposed entity will have a combined asset base of around ₹18 lakh crore. The merger will result in a sharp rise in competitive intensity in the industry given the new HDFC, which is twice the size of ICICI Bank’s book and the fairly deep distribution franchise.
ED says NBFCs and FinTech backed by Chinese funds seen violating RBI guidelines
According to the enforcement directorate, several fintech companies and NBFCs “backed by” Chinese funds have generated proceeds of crime worth more than Rs 940 crore by indulging in predatory lending activities and violating RBI guidelines while operating in India.
ED has found that various fintech (financial technology) companies backed by Chinese funds have made agreements with these NBFC companies for providing instant personal loans of term ranging from 7-30 days.The Enforcement Directorate (ED), therefore, recently attached Rs 86.65 crore worth funds lying in a total of 155 bank and payment gateway accounts of NBFCs like Kudos Finance and Investments Private Limited, Acemoney (India) Limited, Rhino Finance Private Limited, and Pioneer Financial and Management Services Private Limited and their linked fintech companies.
Inflation expected to ease on second half of this fiscal year
Inflation is expected to ease gradually in the second half of 2022-23 as per the RBI’s current assessment as the supply outlook appears favourable and several high frequency indicators pointing to resilience of the recovery in the first quarter (April-June) of 2022-23. The month of October will see inflation easing, minimising the need for aggressive RBI action, Governor Shaktikanta Das said at an economic conclave.
