RBI Eases Foreign Borrowing Rules for PSUs, FCNR(B) Deposits and FII Investment Limits

Source: The Indian Express

Context

The Reserve Bank of India (RBI) has unveiled a package of measures to boost foreign capital inflows and stabilise the rupee, by easing norms for foreign borrowings by state-owned enterprises, incentivising banks to mobilise FCNR(B) deposits, and liberalising FII and NRI/OCI investment limits. The move complements the government’s decision to scrap capital gains tax and withholding tax on FII investment in government bonds. RBI Governor Sanjay Malhotra said these steps are expected to strengthen the balance of payments and attract foreign capital inflows during a period of rupee pressure and FPI outflows (about USD 13.4 billion equity and USD 0.3 billion debt outflows during 1 April to 2 June 2026).

Key Facts

• Step 1: Cheaper dollar loans for PSUs. PSU companies borrowing in dollars get a subsidised hedging cost from the RBI till 30 September 2026, making dollar loans cheaper.
• Step 2: Cheaper NRI deposits for banks. Banks raising 3- to 5-year FCNR(B) deposits (deposits in foreign currency held by NRIs and OCIs) get full hedging cost support till September 2026, so they can offer better rates to NRIs.
• Step 3: More bond access for foreigners. Under the Fully Accessible Route (FAR), foreigners can now buy new 15-, 30-, and 40-year government bonds freely. Short-term, concentration, and single-security limits have also been removed.
• Step 4: Easier equity investment for NRIs and foreigners. NRIs, OCIs, and all Persons Resident Outside India (PROIs) can now buy listed Indian shares with higher limits and without SEBI registration.
• Step 5: Faster export earnings repatriation. Exporters now have to bring back their export earnings within 9 months, restored from the 15 months allowed in November 2025.

About the Concessional FX Swap Facility for PSU ECBs:

• A swap facility allows PSUs to convert rupee liabilities into foreign currency exposure, or vice versa, at more favourable terms than market-based hedging.
• The RBI is lowering the hedging and funding cost of foreign currency borrowing by PSUs, nudging them to tap cheaper overseas capital.

About the FCNR(B) Swap Facility for AD Banks:

• The RBI will provide full hedging cost on fresh 3- to 5-year FCNR(B) deposits raised by Authorised Dealer (AD) banks until September 2026.
• An FCNR(B) account is a fixed deposit in India held by NRIs and OCIs in foreign currencies like USD, GBP, EUR, or CAD, avoiding currency fluctuation risks for the depositor.
• With hedging costs subsidised, banks can offer more competitive interest rates without eating into their margins.
• This is expected to strengthen foreign currency inflows into the banking system, support FX liquidity, and stabilise the external account.

What is Fully Accessible Route (FAR)?

• The Fully Accessible Route (FAR) allows FIIs to buy and sell designated G-secs without any quantitative ceiling.
• The FAR has been expanded to include all new issuances of 15-year, 30-year, and 40-year G-secs.
• General Route restrictions removed: short-term investment caps, concentration limits, and individual security limits.
• These steps complement the government’s decision to scrap capital gains tax and withholding tax on FII investment in government bonds.

What is Liberalisation for NRIs, OCIs, and PROIs?

• NRIs (Non-Resident Indians), OCIs (Overseas Citizens of India), and now all Persons Resident Outside India (PROIs) get higher investment limits in listed equity instruments.
• They can invest without separate registration with SEBI.

About Export Realisation Time Limit:

• The RBI has proposed to restore the time limit for realisation of export proceeds to 9 months, providing breathing room for exporters facing global trade headwinds.

Key Terms:

• External Commercial Borrowings (ECBs): Loans taken by Indian companies (including PSUs) from foreign lenders in foreign currency (mostly USD), subject to RBI rules on end-use, maturity, and cost.
• FCNR(B) Account: Foreign Currency Non-Resident (Bank) account, a fixed deposit held by NRIs/OCIs in India in foreign currencies, so the depositor faces no rupee depreciation risk.
• Authorised Dealer (AD) Banks: Banks licensed by the RBI under FEMA to deal in foreign exchange.
• Hedging Cost: The cost of protecting against exchange rate movements through instruments like forwards and swaps.
• Forex Swap: A contract to exchange a sum in one currency for another now, and reverse the transaction later at a pre-agreed rate.
• Fully Accessible Route (FAR): A regime under which foreign investors can freely buy and sell specified Government of India securities without any quantitative limit.
• General Route for FII Investment: An alternative regime with specified caps and concentration limits for FII debt investments.
• NRI (Non-Resident Indian): An Indian citizen who lives outside India for tax or stay purposes.
• OCI (Overseas Citizen of India): A foreign citizen of Indian origin granted lifelong visa and certain rights in India (excluding voting).
• PROI (Person Resident Outside India): Any person resident outside India under FEMA, including NRIs, OCIs, and foreign nationals.
• Capital Gains Tax (in this context): Tax on profits earned from selling investments like bonds and securities.
• Withholding Tax: A tax deducted at source when income (like interest or dividend) is paid to a foreign investor, before the money leaves the country.

Practice MCQs

Q1. With reference to the RBI’s recent measures to boost foreign capital inflows, consider the following statements:

1. The RBI has announced a concessional foreign exchange swap facility for ECBs by PSUs until 30 September 2026.
2. AD banks will get a similar facility covering the full hedging cost for fresh 3- to 5-year FCNR(B) deposits until September 2026.
3. The RBI has also expanded the Fully Accessible Route (FAR) for FIIs by including new 15-, 30-, and 40-year G-sec issuances.
4. These measures complement the government’s decision to scrap capital gains tax and withholding tax on FII investment in government bonds.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

Q2. Consider the following statements about FCNR(B) accounts:

1. FCNR(B) is the Foreign Currency Non-Resident (Bank) account scheme.
2. It is a fixed deposit held by NRIs and OCIs in foreign currencies like USD, GBP, EUR, or CAD.
3. It protects the depositor from rupee depreciation risk.
4. FCNR(B) deposits can only be held in Indian rupees.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; FCNR(B) deposits are held in foreign currencies, NOT Indian rupees.)

Q3. With reference to the Fully Accessible Route (FAR), consider the following statements:

1. Under FAR, FIIs can buy and sell designated Government of India securities without any quantitative ceiling.
2. The RBI has expanded FAR to include all new issuances of 15-, 30-, and 40-year G-sec bonds.
3. The General Route restrictions on short-term investments, concentration limits, and individual security limits for FII investments have been removed.
4. The FAR is governed by the Ministry of External Affairs and not the Reserve Bank of India.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; FAR is governed by the Reserve Bank of India, not the Ministry of External Affairs.)

Q4. Consider the following statements about NRIs, OCIs, and Persons Resident Outside India (PROIs):

1. NRIs are Indian citizens who reside outside India for tax or stay purposes.
2. OCIs are foreign citizens of Indian origin granted lifelong visa and certain rights in India, excluding voting.
3. PROIs include NRIs, OCIs, and foreign nationals as defined under FEMA.
4. The RBI has restricted PROIs from investing in Indian listed equity instruments under any route.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; the RBI has liberalised investment limits for NRIs, OCIs, and PROIs in listed equity instruments, without requiring SEBI registration.)

Answer Key

1. (d), All four statements are correct.
2. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because FCNR(B) deposits are held in foreign currencies, not rupees.
3. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because the FAR is governed by the RBI, not the Ministry of External Affairs.
4. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because the RBI has actually liberalised, not restricted, PROI investment in listed equity instruments.