On Wednesday, the Reserve Bank of India unveiled several policy measures that will have far-reaching implications for the financial markets, both equity and debt, help boost the flow of credit and push forward the internationalisation of the Indian rupee. This pivot of the central bank away from the conservatism that has so far defined its approach towards a more liberal framework comes at a time of significant changes in the geopolitical and economic environment and global trading systems.
The measures announced to increase credit operate at multiple levels. One, the RBI is allowing banks to “finance acquisitions” by Indian corporates, an activity they have been prohibited from. Two, it is also easing the flow of funds to large borrowers by proposing to scrap its 2016 framework that had placed restrictions on lending. These moves could possibly accelerate M&As in the economy while boosting credit growth to the industry, which has been sluggish, averaging just 6.5 per cent since January this year — M&A deals were estimated at $120 billion in 2023-24 as per a report by economists at the SBI. But there is the risk of “reckless borrowing” by corporates, as a report in this paper points out. Alongside, the central bank has proposed to increase banks’ lending limit against shares to Rs 1 crore and for IPO financing to Rs 25 lakh. This will boost the flow of funds into equity markets. Investors welcomed these announcements with shares of banks such as HDFC, ICICI and Kotak rising on the day.
The central bank has also announced measures to increase the usage of the rupee in international transactions. It will permit banks to lend rupees to non-residents in neighbouring countries like Bhutan, Nepal and Sri Lanka for cross-border trade. This is a significant step in the endeavour to internationalise Indian currency, and not rely on the USD, for the purposes of trade. But for the rupee to be widely used, and to emerge as an acceptable medium of exchange, there needs to be confidence in its stability. Alongside, the central bank has also permitted the balances in Special Rupee Vostro Accounts — these accounts have facilitated India-Russia oil trade — to be invested in corporate bonds and commercial papers. This will increase the avenues available for deploying the funds. It will also establish reference rates for currencies of major trading partners such as the UAE, making transactions more efficient. Each of these steps is designed to push for greater use of the Indian rupee in international transactions, and pave the way for its greater acceptance, while protecting the economy from sudden exchange rate movements. As the RBI pushes forward, it must proceed carefully, be mindful of the associated risks.
(Note: An incorrect text was uploaded earlier. The error is regretted.)
