RBI eases norms for PSUs, banks to get foreign fund inflows, Pg1

Key Highlights:

• The Reserve Bank of India (RBI) eased norms for Public Sector Undertakings (PSUs) to borrow overseas and for banks to mobilize foreign currency deposits.
• A concessional foreign exchange swap facility is offered to PSUs until September 30, 2026, to encourage External Commercial Borrowings (ECBs).
• A similar facility, covering full hedging costs, is available to authorized dealer banks for raising 3-5 year Foreign Currency Non-Resident (Bank) (FCNR(B)) deposits until September 2026.
• These measures aim to attract foreign capital inflows, reduce borrowing and hedging costs, and support external account stability.

Detailed Insights:

• The RBI's move complements the government's decision to remove capital gains tax and withholding tax on Foreign Institutional Investor (FII) investment in government bonds.
• The concessional swap facility effectively lowers the hedging and funding costs for Public Sector Undertakings (PSUs), making overseas borrowing more attractive.
• Public Sector Undertakings (PSUs) had previously shifted away from External Commercial Borrowings (ECBs) due to increased foreign exchange exposure risks.
• Foreign Currency Non-Resident (Bank) Account (FCNR(B)) deposits allow Non-Resident Indians (NRIs) or Overseas Citizens of India (OCIs) to hold foreign currency, mitigating exchange rate fluctuation risks.
• By reducing hedging costs, banks can offer more competitive interest rates on FCNR(B) deposits, attracting stable, medium-term foreign currency inflows.
• Increased FCNR(B) inflows enhance dollar availability within the banking system, which helps smoothen foreign exchange liquidity conditions.
• In FY26, FCNR(B) inflows were $946 million, a significant drop from $7 billion in FY25.
• A special swap window in 2013 allowed banks to raise approximately $30 billion through FCNR(B) deposits when the rupee was under pressure.

Key Concepts Involved:

• External Commercial Borrowings (ECBs): Loans raised by Indian entities from foreign sources in foreign currency.
• Foreign Currency Non-Resident (Bank) Account (FCNR(B)): A fixed deposit account in India for NRIs/OCIs, held in foreign currency to avoid exchange rate risk.
• Foreign Exchange Swap Facility: An arrangement allowing conversion of liabilities between rupee and foreign currency at predetermined, often concessional, terms.