Economics

India’s External Debt Management – Major Policy Developments during 2018-19 and 2019-20 so far

External Commercial Borrowings (ECB) November 2018:

The Reserve Bank, in consultation with the Government of India, decided to reduce the mandatory hedge coverage from 100 percent to 70 percent for ECB raised under Track I of the ECB framework by eligible borrowers for a maturity period between 3 and 5 years.

January 2019: In order to rationalise the extant framework for ECB and Rupee Denominated Bonds (RDBs), the Reserve Bank, in consultation with the Government of India, decided to merge Tracks I and II as “Foreign currency denominated ECB” and Track III and RDBs framework as “Rupee Denominated ECB”. It was decided to include all entities eligible to receive FDI as eligible borrowers. Additionally, Port Trusts, Units in special economic zone (SEZ), Small Industries Development Bank of India (SIDBI), EXIM Bank, registered entities engaged in micro-finance activities, viz., registered not for-profit companies, registered societies/trusts/cooperatives and non-government organisations were also allowed to borrow under this framework.

February 2019:The Reserve Bank, in consultation with the Government of India, decided to relax the end-use restrictions for resolution applicants under the Corporate Insolvency Resolution Process (CIRP) and allow them to raise ECB from the recognised leaders, except the branches/overseas subsidiaries of Indian banks, for repayment of rupee term loans of the target company under the approval route.

July 2019: The Reserve Bank, in consultation with the Government of India, decided to relax the end-use restrictions for ECB. Accordingly, eligible borrowers were permitted to raise ECB for the following purposes from recognised lenders, except foreign branches/overseas subsidiaries of Indian banks:

i.ECB with a minimum average maturity period of 10 years for working capital purposes and general Annex I: India’s External Debt Management – Major Policy Developments during 2018-19 and 2019-20 so for corporate purposes. Borrowing by non-banking financial companies (NBFCs) for the above maturity for on-lending for the above purposes is also permitted.

ii.ECB with a minimum average maturity period of 7 years can be availed by eligible borrowers for repayment of rupee loans availed domestically for capital expenditure as also by NBFCs for on-lending for the same purpose. For repayment of rupee loans availed domestically for purposes other than capital expenditure and for on-lending by NBFCs for the same, the minimum average maturity period of the ECB is required to be 10 years.

iii. It was decided to permit eligible corporate borrowers to avail ECB for repayment of rupee loans availed domestically for capital expenditure in the manufacturing and infrastructure sector if classified as SMA-2 or NPA, under any one-time settlement with lenders. Lender banks are also permitted to sell, through assignment, such loans to eligible ECB lenders, except foreign branches/overseas subsidiaries of Indian banks, provided the resultant external commercial borrowing complies with all-in-cost, minimum average maturity period and other relevant norms of the ECB framework.

FPI Investments in Debt SecuritiesApril 2018:

The Reserve Bank revised the minimum residual maturity requirement for investment by FPIs in Central Government securities (G-secs). FPIs were permitted to invest in G-secs, including in Treasury Bills, and State Development Loans (SDLs) without any minimum residual maturity requirement (earlier it was three years), subject to the condition that short-term investments by an FPI under either category shall not exceed 20 percent of the total investment  Sustainability and Vulnerability of that FPI in that category. Also, FPIs were permitted to invest in corporate bonds with minimum residual maturity of above one year (earlier it was three years), subject to the condition that short-term investments in corporate bonds by an FPI shall not exceed 20 percent of the total investment of that FPI in corporate bonds.

February 2019: In order to encourage a wider spectrum of investors to access the Indian corporate debt market, the Reserve Bank decided to withdraw the provision stating that “no FPI shall have an exposure of more than 20 percent of its corporate bond portfolio to a single corporate (including exposure to entities related to the corporate)”.

March 2019: The Reserve Bank, in consultation with the Government of India and Securities and Exchange Board of India (SEBI), introduced a separate channel, called the ‘Voluntary Retention Route (VRR)’, to enable FPIs to invest in debt markets in India. Broadly, investments through the Route is free of the macro-prudential and other regulatory norms applicable to FPI investments in debt markets, provided FPIs voluntarily commit to retain a required minimum percentage of their investments in India for a period.

April 2019: As a measure to broaden access of non-resident investors to debt instruments in India, the Reserve Bank permitted FPIs to invest in municipal bonds.

Non-resident Rupee AccountsNovember 2019:

With a view to promote the usage of INR products by persons resident outside India, the Reserve Bank in consultation with the Government of India decided to expand the scope of Special Non-resident Rupee (SNRR) Account by permitting person resident outside India to open such account for:

(i) ECB; (ii) trade credits; (iii) trade (export/import) invoicing; and (iv) business-related transactions outside International Financial Service Centre (IFSC) by IFSC units at Gujarat International Finance Tec-City (GIFT) like administrative expenses in INR outside IFSC, INR amount from sale of scrap, government incentives in INR, etc. The account will be maintained with bank in India (outside IFSC).


Source: An Assessment of India’s External Debt Sustainability and Vulnerability [RBI Bulletin January 2020]

Categories: Economics

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