RBI Steps to Arrest Free Fall in Rupee

Indian ₹ has reached the ₹80 levels for 1$. Though the Indian rupee has been experiencing a downturn vis-a-vis the US Dollar, it is still performing better than many other currencies in emerging market economies. That is because of the timely interventions of the RBI to support the depreciating rupee. Ever since the Ukraine war started in February 2022, coupled with the US Federal Reserve’s hawkish monetary stand has led to capital outflows from India. The foreign exchange reserves of India dwindled from record highs of $642 billion to $580 billion. RBI has used the forex reserves to support the free-fall in the rupee. However, it was not adequate. RBI had to come up with timely interventions to arrest the fall of the Indian rupee vis-a-vis US $. The following are the measures taken by the RBI so far to support the depreciating Indian rupee. 

1. Freehand for banks handling Foreign Currency Deposits: India needs the flow of foreign currency to stabilize the falling rupee. RBI tried to make sure banks that are accepting foreign currency deposits do away with the mandatory CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio). These will apply to banks accepting Foreign Currency Non-Resident Bank (FCNR (B)) and Non-Resident Exchange Rupee (NRE) deposits. This will enable the banks to pass on the reduction of costs to the customers and bring in more foreign currency deposits.
2. Allowing Banks To Offer Higher Interest Rates on FCNR(B), NRE Deposits:
   Since the costs of the banks handling foreign currency have been reduced, they started hiking interest rates. This means that the banks dealing with foreign currency deposits have to deal with a scenario where their interest rates become higher than the domestic banks’ interest rates. However, the RBI had a limit that has not allowed such banks to offer higher interest rates than their domestic peer banks. RBI has temporarily lifted this embargo and the banks are now free to offer higher interest rates on foreign currency deposits. SBI, HDFC Bank, and ICICI Bank have acted swiftly to raise the interest rates on FCNR(B) deposits already.
3. Foreign Currency Lending by Banks: RBI has allowed banks till October 31st, 2022 to lend foreign currency to a wider set of purposes than were allowed earlier. 
4. More Funds Through External Commercial Borrowings: The Indian firms which opt for External Commercial Borrowings (ECB) can now seek foreign lending up to $1.5 billion till December 31st, 2022. Earlier this limit was $750 million only. 
5. Making Indian Debt Market Attractive for FPIs: The RBI has expanded the list of securities offered under the ‘Fully Accessible Route’ for FPIs to include 7-year and 14-year sovereign bonds. The RBI has also removed the 30% limit of FPIs in investment bonds with residual maturity of less than one year. 
6. International Trade Settlements in Indian Rupee: The RBI on July 11th directed the banks to make additional arrangements for the settlement of export and import transactions in the Indian rupee. This, if accepted by the trading partner countries, could lead to a surge in demand for the Indian rupee vis-a-vis the US dollar. Indian banks will have to open Special Vostro Accounts with the banks of the trading partner countries with permission from RBI to enable the trade in Rupee.