INFLOWS DUE TO GOVT, RBI'S FOREX MEASURES TO PEAK IN SEPTEMBER, Pg21

Key Highlights:

• The Reserve Bank of India (RBI) and the government have introduced measures to boost foreign inflows, with the maximum impact anticipated by September 2026.
• These measures include a concessional foreign exchange swap facility for FCNR(B) deposits and Public Sector Undertakings (PSUs)' foreign loans.
• The government has also removed capital gains tax and withholding tax for foreign investors on Indian government debt, effective April 1, 2026.
• Inflows into Indian government debt are further expected from March 2027 due to their likely inclusion in the Bloomberg Global Aggregate Index.
• The combined measures could attract an estimated $60-70 billion in foreign capital, significantly improving India's external financing position.

Detailed Insights:

• The RBI's swap facility for FCNR(B) deposits allows banks to mobilize fresh three- to five-year deposits, with the RBI bearing the full hedging cost.
• These FCNR(B) deposits are also exempt from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements, making them more attractive for banks.
• The PSU foreign loan swap scheme offers a fixed rate of 1.5% per annum for eligible External Commercial Borrowings (ECBs), reducing hedging costs for state-owned entities.
• The tax exemptions for foreign investors in government bonds aim to attract more stable foreign capital and support the Indian Rupee.
• India's potential inclusion in the Bloomberg Global Aggregate Index is expected to draw an additional $20-25 billion in passive foreign investment.
• These reforms are designed to deepen the bond market, reduce rupee volatility, and strengthen India's external balances.
• The Fully Accessible Route (FAR) for government securities has been expanded, removing investment limits for foreign portfolio investors.

Key Concepts Involved:

• Foreign Currency Non-Resident (Bank) [FCNR(B)] Account: A fixed deposit account for Non-Resident Indians (NRIs) held in foreign currency, offering protection against exchange rate fluctuations and tax-free interest in India.
• External Commercial Borrowings (ECBs): Loans raised by eligible resident entities in India from recognized non-resident entities, typically in foreign currency.
• Foreign Exchange Swap: A financial transaction where two parties exchange equivalent amounts of two different currencies for a specified period, often used to manage currency risk.
• Bloomberg Global Aggregate Index: A major international fixed-income benchmark that tracks the performance of investment-grade, fixed-rate bonds globally.