RBI has a playbook for a stronger rupee, Pg11

Key Highlights:

• The Reserve Bank of India (RBI) temporarily relaxed interest rate restrictions on Foreign Currency Non-Resident (Bank) [FCNR(B)] and Non-Resident External (NRE) deposits until September to attract foreign inflows.
• These measures, along with a concessional forex swap facility, aim to mobilize nearly $20 billion in dollar funding and could attract up to $10 billion in additional inflows.
• The government doubled the individual investment limit for Persons Resident Outside India (PROIs) in equities from 5% to 10% and increased the collective limit from 10% to 24%.
• Foreign Institutional Investors (FIIs) were exempted from income tax on interest and capital gains from Government Securities (G-Secs), effective April 1, to deepen the bond market.
• These reforms collectively aim to strengthen the rupee, attract stable foreign capital, and reduce government borrowing costs.

Detailed Insights:

• India's rupee depreciation is predominantly caused by its lopsided dependence on crude oil imports, a key input.
• The RBI measures complement a series of efforts to attract overseas capital and fortify India's external finances.
• Allowing banks to offer competitive returns and providing a concessional forex swap facility creates an arbitrage opportunity for foreign investors and the diaspora.
• The increase in investment limits for PROIs reduces compliance friction, drawing stable foreign capital directly into the corporate sector.
• The G-Sec market reform addresses the lack of global depth, as commercial banks, insurers, and the RBI hold nearly 75% of outstanding government securities.
• Eliminating the withholding tax makes Indian sovereign debt more competitive with global benchmarks like US Treasuries and Japanese government bonds.
• This reform strengthens India's case for inclusion in major global bond indices, ensuring sustained institutional inflows.
• Extending similar tax parity to the Bank for International Settlements enhances India's credibility with central banks and sovereign wealth funds.
• A deep and liquid sovereign debt market is crucial for sustaining domestic investment, with private sector capital expenditure rising 67% year-on-year in September 2025.
• Lower sovereign yields establish more efficient benchmark rates, thereby reducing the cost of corporate borrowing.

Key Concepts Involved:

• Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits: Term deposits held by non-resident Indians in foreign currency, allowing them to avoid exchange rate risk.
• Non-Resident External (NRE) deposits: Rupee-denominated accounts for non-resident Indians, where both principal and interest are fully repatriable.
• Government Securities (G-Secs): Debt instruments issued by the government to borrow money, serving as a low-risk investment.
• Foreign Institutional Investors (FIIs): Overseas entities that invest in the financial markets of a country other than their own.