The Reserve Bank of India (‘RBI’), on July 06 and 07, 2022, announced certain measures to enhance the sources of forex funding for Indian financial markets, to mitigate recession risks and instances of retrenchment of portfolio flows. Amongst the measures to ‘enhance forex inflows while ensuring overall macroeconomic and financial stability’, the RBI has introduced the following key measures:

1.     Liberalise Regulatory Regime Relating to FPIs Investment in Debt Instruments

The following relaxations have been announced for investment by foreign portfolio investors (‘FPIs’) in corporate bonds and Government securities (‘G-secs’) through the medium-term framework (‘MTF’) route and the fully accessible route (‘FAR’).

i.     Investments in Corporate Bonds

Currently, FPI investment in debt instruments under the MTF is subject to: (a) the residual maturity of the debt instruments being purchased being at least one year; and (b) not >30% of their investments in corporate bonds having a residual maturity of less than one year.

RBI has decided to relax the restrictions under (a) and (b) above for investments between July 08, 2022 till October 31, 2022 (‘Exempt Period’) in the following manner:

• During the Exempt Period, FPIs can invest in corporate money market instruments , commercial paper and non-convertible debentures with an original maturity of up to one year and continue to stay invested in these instruments till their maturity / sale; and
• Further, any investments in corporate bonds and G-secs made during the Exempt Period, will not be subject to ‘short term limit’ till maturity or sale of these instruments (in other words, investments during the Exempt Period will not be counted towards the cap of short term instruments held by such FPIs) till maturity or sale of these instruments.

ii.    FAR

The RBI has also decided that all new issuances of G-secs of seven-year and 14-year tenors, including the current issuances of 7.10% GS 2029 and 7.54% GS 2036, will be designated as ‘specified securities’ under the FAR, making these G-secs available for investment by non-resident investors under the FAR.

2.     Liberalise Regulatory Regime Relating to ECBs

Under the automatic external commercial borrowing (‘ECB’) route, eligible borrowers are allowed to raise funds without approaching the RBI, up to US$ 750 million (and as long as the borrowing is in conformity with certain prudential parameters of the ECB framework, including an ‘all-in cost’ which sets the ceiling for the maximum rate of interest, other fees, expenses, charges, guarantee fees, ECA charges, etc. which may be charged for the ECB).

The RBI has decided to temporarily (till December 31, 2022) increase the limit under the automatic route from US$ 750 million or its equivalent per financial year to US$ 1.5 billion. Further, the all-in cost ceiling under the ECB framework is also being raised by 100 basis points, subject to the borrower being of investment grade rating.

The above policy changes under Paragraph (2) have been proposed by RBI in its recent Press Release; however, these are yet to be incorporated into the Regulations via appropriate Circulars. This update (under Paragraph 2) is subject to terms of the relevant Circular/s issued by the RBI.