RBI’S Forex Quest: Analysing The Amendments To ECB And FPI Policy


In an attempt to mitigate the surging downwards pressure on the Indian Rupee (“INR”)  and address the depletion in forex reserve from the retrenchment of portfolio flows, the Reserve Bank of India (“RBI”) has notified a range of regulatory relaxations to attract foreign investments in the domestic debt market. The liberalization measures inter alia include amendment in External Commercial Borrowing (ECB) policy and relaxation in eligibility and regulatory provisions vis-a-vis foreign portfolio investments in Indian debt through the Medium-Term Framework (“MTF”), the Voluntary Retention Route (“VRR”), and the Fully Accessible Route (“FAR”).

In light of these amendments, this post analyses the regulatory structure governing foreign investments in the Indian debt market. It further attempts to gauge the opportunities that the measures enabling the liberalization of capital accounts bring for Indian businesses and assess the challenges impeding their successful operationalization.

Amendments to the External Commercial Borrowing Policy

External Commercial Borrowings (“ECB”) are debts raised by eligible resident businesses from non-resident entities through authorised dealers. In India, these borrowings are regulated by the RBI under Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. Following the liberalization of the Indian economy and the advent of globalization, the central bank has undertaken a series of reforms in the ECB Policy to eliminate regulatory hurdles and facilitate easy access to external borrowings for eligible domestic businesses.

The liberalization of the ECB Policy enabled an Automatic Route for eligible businesses to raise ECB from the international market without approaching the Central Bank for approval. The eligible borrowers can raise external debt in any freely convertible foreign currency through the Authorised Dealers (“AD”) (authorised under Subsection (1) of Section 10 of the Foreign Exchange Management Act, 1999).

However, these borrowings are subject to the prudential regulations with regard to the overall dynamic limit, all-in cost limit (i.e., cost of borrowing), and the minimum maturity requirements as provided under Foreign Exchange Management (Borrowing and Lending) Regulations, 2018.

To address the dollar supply issue caused by depleting forex reserves and ensure the availability of adequate credit supply for businesses, the RBI has amended the ECB Policy. The Foreign Exchange Management (Borrowing and Lending) (Amendment) Regulations, 2022 notified on 29th July, 2020 provides for a temporary increase in the limit under the automatic route from US$ 750 million or its equivalent per financial year to US$ 1.5 billion and raises the all-in-cost ceiling (i.e., rate of interest, other fees, expenses, charges, guarantee fees, ECA charges, etc.) for ECBs, by 100 basis points.

Building up on the series of post-1991 liberalization measures vis-à-vis capital account, the amendments widen the avenues of forex inflow in the economy. They provide eligible businesses with an opportunity to raise higher debt from the international market at lower costs and further the ease of doing business in the country by eliminating the regulatory hurdles.

However, in the wake of unprecedented downwards pressure on INR, the parking and maturity regulations prescribed in the ECB policy pose a significant challenge to the successful materialization of the objective behind the reforms to ECB policy. These regulations may disincentivise eligible borrowers to opt for ECB in the short term.

The apprehensions are further exacerbated by the prevailing economic volatility as a depreciating INR coupled with Federal Reserve’s interest rate hikes may erode the cost advantages of external borrowings for Indian business. Depreciation of INR can significantly increase the external debt obligations of the businesses and consequently cancel out the low-interest cost advantage of the ECB, which is already under threat from the Federal Reserve’s interest hikes in the US.

FPI Investments in Debt through FAR, VRR, and MTF

The liberalization of ECB policy has been accompanied by relaxation in regulations governing the inflow of Foreign Portfolio Investments (“FPI”) in Indian debt instruments. In its bid to counter the adverse impact of risk aversion and the retrenchment of portfolio flows (i.e., outflow of foreign investment) from the equity market, the central bank has attempted to make Indian government securities and corporate bonds an attractive alternative against safe heaven flights to Federal securities.  The RBI has liberalized the eligibility, holding, and liquidation criteria for FPI investment in Indian government securities and corporate bonds through the Fully Accessible Route (“FAR”), the Voluntary Retention Route (“VRR”), and the Medium-Term Framework (“MTF”).

1.Medium-Term Framework

Medium Term Framework was introduced by the central bank in 2015 to enable FPI investments in corporate debt instruments with residual maturity of more than one year. Under the regulations prescribed therein the residual maturity of not more than 30 per cent of investments made by FPIs in both government securities and corporate bonds could be less than twelve months.

Residual maturity is the time pending before maturity of the bond. Consequently, MTF envisages a bar on FPI investments in short term securities issued by Indian businesses.

However, to mitigate the depletion of forex reserve and ensure adequate liquidity in the money market, RBI has decided to allow FPI investments in corporate bonds with residual maturity of less than one year. The relaxation will be available for investments made in the period between 8th July 2022 to 31st October 2022 and the investments will remain exempted from the limit on short-term investments till their sale or maturity.

The relaxations will enable FPIs to invest in commercial papers and non-convertible debentures with maturity of up to one year. This will help in facilitating the availability of adequate liquidity in the domestic money market and reduce the cost of short-term borrowings for Indian businesses.

2.Fully Accessible Route

Introduced in 2020, Fully Accessible Route exempts the investments made by non-resident investors in specified government securities from the limits and regulations on FPI investments in the Indian debt market. Under FAR, securities issued by the central government with a tenor of five-year, ten-year, and thirty-year have been notified as “specified securities”.

However, in its bid to make Indian debt instruments an attractive alternative to the safe heaven flights to Federal Reserve’s securities, the RBI has increased the scope of specified securities under FAR. Issuing direction under Section 45W of Chapter IIID of the Reserve Bank of India Act, 1934 the central bank has notified all Government Securities with a tenor of seven years and fourteen years, as specified securities under FAR.

This will provide a more diverse basket of government securities to investors beyond MTF and VRR. Consequently, increasing the availability of liquidity across the sovereign yield curve by attracting FPI investment in Government securities.

However, the objective of increasing forex inflow through restriction-less investment in specified government securities faces a stiff challenge from an increase in interest rates in the United States of America.

3.Voluntary Retention Route

The investments made by FPI under VRR are exempted from regulatory requirement otherwise applicable to FPI investments in Indian debt market. However, unlike FAR, the exemptions under VRR are not unconditional. The FPI have to voluntarily commit to retain at least seventy five percent of their total investment in the Indian market for a period of 3 years.

Despite the prescribed voluntarily retention, VRR offers foreign portfolio investors greater control and a wider scope for strategic manoeuvres to maximize their gain. The absence of minimum residual maturity limit, concentration limit, and limit on sector wise investment provides the investors higher operational flexibility. While simultaneously furthering RBI’s objective of maintaining adequate liquidity in the debt market and protecting the forex reserve from sudden retrenchment.

The provisions governing VRR have not been amended in the present set of reforms. However, citing the increase in interest shown in them by the foreign portfolio investors, the RBI increased the cap on foreign portfolio investments under VRR from ₹1,50,000 crore to ₹2,50,000 crore in February 2022.

While there have been no further policy development in the laws governing inflow of the foreign debt, these amendments have acted as a catalyst in promoting forex inflow as the resident business have entered into External Commercial Borrowing agreements for more than US$ 8.6 billion after 6th July 2022.


The liberalization measures are a step towards making the Indian debt market an attractive option for foreign portfolio investors, while simultaneously reducing the cost of borrowing and increasing the ease of doing business for domestic businesses.

Though their success faces a significant challenge from global economic volatility, in the backdrop of retrenchment in India’s forex reserve and a slowdown in the inflow of foreign investments, these measures can prove to be significant mitigating instruments. An increase in external borrowings and foreign portfolio investments in the Indian debt market can act as a counterbalance against outflow of foreign investments from the equity market and will contribute towards RBI’s attempts of stabilizing INR. They can be instrumental in mitigating the pressure on deposits and checking the increasing interest rates while ensuring the availability of adequate credit supply in the debt market.

This article has been authored by Ritu Raj, a 3rd year law student at Gujarat National Law University, Gandhinagar.

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