On 5 June, the government and the Reserve Bank of India (RBI) announced a slew of measures targeted at attracting more foreign debt into India.
This included a tax exemption on foreigners’ investment in government securities; the RBI bearing the full hedging cost for banks raising Foreign Currency Non-Resident Bank (FCNR[B]) deposits; and subsidising the hedging cost for external commercial borrowings (ECBs) raised by public sector enterprises.
There has been significant pressure on India’s foreign exchange reserves, resulting in massive depreciation of the rupee against the US dollar of more than 12 percent in the last year. The government and the RBI are willing to take on more debt ostensibly to prevent further erosion in forex reserves—and to provide a safety belt to the rupee exchange rate.
Conspicuously, no measures, barring a token effort permitting Persons Resident Outside India (PROI) to invest in India’s listed companies and a pro forma increase in the overall investment limit from 10 to 24 percent, have been taken for boosting foreign investment.
Is there a panic in the government and the RBI rushing for more debt? Will these measures trade prudential safeguards for risky foreign debt inflows? Will there be a flood of debt inflows? Will it secure India’s foreign reserves and external stability or make it more vulnerable?