Rupee close to 80 per dollar: How RBI steps may help stabilise it

The rupee has witnessed significant pressure versus the US dollar following the Russian invasion of Ukraine in late February 2022.

The domestic unit that had depreciated a mild 0.3 per cent against the dollar till February 23 — the day before Russia invaded Ukraine — has lost 6.9 per cent versus the greenback so far in the calendar year. The domestic currency, which over the past month has successively plumbed new lows, is now a stone’s throw away from the 80 per US dollar mark.

The combination of surging commodity prices since the Ukraine war and the US Federal Reserve’s aggressive rate hike trajectory have led to substantial capital outflows from emerging market economies, including India.

Since February, the Reserve Bank of India (RBI) has used a significant amount of its foreign exchange reserves to shield the rupee from a free fall. Headline foreign exchange reserves have declined by around $50 billion since late February as the RBI has sold dollars. As a result, the rupee has fared better versus the US dollar than some of its emerging market peers.

Over the past month, the RBI has also taken several steps to attract fresh overseas capital to Indian markets.

Here are some of the steps taken by the RBI to bring in more foreign capital and support the rupee

1: Greater mobility for banks in handling foreign currency deposits: The RBI said beginning July 30, banks do not have to maintain CRR (cash reserve ratio) and SLR (statutory liquidity ratio) on incremental deposits flowing into FCNR (B) (foreign currency non-resident bank) and NRE (non-resident external rupee) deposits. The step reduces banks’ costs and enables them to pass on the benefits to customers.

2. Giving banks room to offer higher interest rates on FCNR(B), NRE deposits: The RBI has temporarily removed a limit on interest rates that can be offered on new FNCRB deposits. For NRE deposits, the RBI has temporarily exempted banks from adhering to a regulation that prevented interest rates on such deposits outstripping those on comparable domestic term deposits. SBI and ICICI Bank have raised FCNR(B) deposit rates to attract more overseas flows.

3. Wider scope of foreign currency lending by banks: The RBI has provided a window till October 31 for eligible banks to lend out borrowed foreign currency for a greater set of purposes than were permitted earlier.

4. Firms can raise more funds via external commercial borrowings (ECBs): The RBI announced a sharp increase in the quantum of funds that Indian firms could raise through external commercial borrowings. The central bank said till December 31, companies availing of the automatic ECB route could raise up to $1.5 billion against $750 million earlier.

5. Making Indian debt more attractive: The RBI expanded the basket of securities that fall under the ‘fully accessible route’ for FPIs to include seven-year and 14-year sovereign bonds. It also removed a 30 per cent limit on overseas investments in bonds with residual maturity of less than one year.