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DAILY NEWS ANALYSIS

  • 19 July, 2022

  • 8 Min Read

STEP TO BOOST FOREX INFLOW

STEP TO BOOST FOREX INFLOW

Recently, the Reserve Bank of India (RBI) has undertaken measures to increase forex inflows, amid the depreciation of the Indian rupee.

Why has the RBI taken Measures to Boost the Forex reserve?

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

What is a Forex Reserve?

Foreign exchange reserves are assets held on reserve by the Central Bank (RBI) in foreign currencies, which includes bonds, treasury bills, and other government securities.

Most foreign exchange reserves are held in US dollars. Other components of foreign exchange reserve includes:

  • Foreign Currency Assets
  • Gold reserves
  • Special Drawing Rights
  • Reserve Tranche Position with the International Monetary Fund (IMF).

What are the Measures to boost foreign reserves?

  • FPI Investment in Debt: Foreign Portfolio Investors can invest in government securities and corporate bonds. It can boost debt portfolio inflows by expanding the basket of securities available to FPIs.

FPI is the route for foreign investment in India. It includes investments in shares of listed Indian companies, Non-Convertible Debentures, units of domestic 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. It is used to facilitate access to foreign money by Indian corporations and public sector undertakings.

  • Export Taxes: The Union government has also increased export taxes on oil and petroleum products and increased import duty on gold, to control the widening Current Account Deficit.

What are ECBs taken by Indian companies?

  • ECBs are commercial loans that eligible resident entities can raise from outside India, that is from a recognized non-resident entity.
  • ECBs can be buyer’s credit, supplier’s credit, foreign currency convertible bonds, foreign currency exchangeable bonds, and loans.
  • ECBs can be raised via the automatic route where cases are examined by the Authorized Category Dealer, or from the approval route where borrowers are mandated to forward their request to RBI through their authorized dealers.
  • Borrowers must follow all the norms on minimum maturity period, maximum all-in-cost ceiling, end-uses, etc.

Why do Indian firms go for ECBs?

  • Low cost: ECBs give companies the benefit of borrowing abroad at lower interest rates.
  • Long-term repayment: They are also an avenue to borrow a large volume of funds for a relatively long period of time.
  • Surpassing exchange fluctuation: borrowing in foreign currencies enables companies to pay for their machinery import etc., thereby nullifying the impact of the varying exchange rates.
  • Long-term profitability: ECBs can help diversify the investor base and funds are available at a lower cost, helping to improve the profitability of companies.
  • Better credit ratings -ECB interest rates are also a function of their ratings in the international market.

Source: The Hindu


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