RBI’s Reforms Latest News
- At a time when India faces rising trade frictions with the US and heightened global debate on alternatives to the dollar, the Reserve Bank of India (RBI) has announced significant measures.
- These aims to strengthen financial markets, boost corporate financing options, and take concrete steps towards internationalising the rupee.
Key Announcements by the RBI
- Monetary policy decisions: The RBI kept the repo rate unchanged at 5.5% and monetary policy stance ‘neutral’.
- Expanding role of banks in corporate consolidation:
- Takeover financing: Banks allowed to finance corporate acquisitions, previously restricted due to risk concerns.
- Impact: Opens a structured, low-cost financing channel for mergers and acquisitions, enhancing competitiveness and capital expenditure.
- Safeguards: Risk-control measures to ensure funds are used productively.
- Relevance: Aligns with Insolvency and Bankruptcy Code (IBC) framework and helps corporates consolidate faster.
- Rupee internationalisation measures:
- Cross-border lending in rupees: Indian banks and their overseas arms are allowed to lend in rupees to residents or institutions in neighbouring countries (Nepal, Bhutan, Sri Lanka).
- Objective: Reduce dollar dependence, strengthen regional financial influence, and build confidence in rupee stability.
- Geopolitical context: Comes amid US threats against BRICS currency initiatives and global debates on dollar dominance.
- Boosting market depth and liquidity:
- IPO financing: The RBI proposed increasing the lending limit for IPO financing to Rs 25 lakh from Rs 10 lakh.
- Loan against shares: It also raised the limit on loan against shares to Rs 1 crore from Rs 20 lakh (last revised in 1998).
- Loan against listed debt: Ceiling removed to promote bond market activity.
- SRVA surplus use: Surplus balances in Special Rupee Vostro Accounts (SRVAs) can now be invested in corporate bonds and commercial papers, enhancing liquidity.
- Expanding forex benchmarking:
- Expanding the list of currencies: Benchmarked by the Financial Benchmarks India Limited (FBIL), adding more currencies beyond USD, Euro, Pound, Yen.
- Significance: Reduces inefficiencies of dollar routing, deepens rupee market, strengthens rupee as a trading and settlement currency.
- Relaxation of large borrower lending framework:
- 2016 restrictions scrapped: Banks can lend more freely to large corporates with exposures above ₹10,000 crore.
- Risk management: Individual bank risks addressed under the Large Exposure Framework; system-wide risks to be managed with macro-prudential tools.
Broader Implications of the Latest RBI’s Reforms
- Corporate sector: Access to structured takeover financing strengthens India Inc.’s competitiveness.
- Banking sector: Greater role in corporate growth stories, diversification of loan books, and higher returns.
- Financial markets: Deeper IPO financing, bond market growth, and improved liquidity.
- Regional economy: Moves to internationalise the rupee enhance India’s financial influence in South Asia.
- Geopolitics: Strategic push for rupee amid US dollar dominance debates and BRICS alternative currency discourse.
Way Forward
- Strengthen risk management: Ensure safeguards against reckless corporate borrowing and asset bubbles.
- Promote regional adoption of rupee: Expand bilateral and multilateral trade settlements in rupee.
- Boost investor confidence: Deepen corporate bond markets and ensure transparency in forex benchmarks.
- Gradual integration: Move cautiously to avoid external shocks while pushing rupee internationalisation.
Conclusion
- The RBI’s latest reforms mark a decisive shift from a conservative, inward-looking financial system to one aspiring for regional dominance and global relevance, signalling confidence in India’s economic resilience.
- These reforms carry risks but reflect a larger ambition: to make the rupee travel beyond borders and empower Indian corporates to expand their global footprint, thereby strengthening India’s financial sovereignty in an evolving multipolar world.
Source: IE
RBI’s Reforms FAQs
Q1: How do the recent RBI measures aim to internationalise the rupee?
Ans: The RBI allowed Indian banks to lend in rupees to neighbouring countries, expanded forex benchmarks, etc.
Q2: What are the implications of permitting banks to finance corporate takeovers?
Ans: It provides cheaper, structured capital for mergers and acquisitions, boosts competitiveness, diversifies loan books, etc.
Q3: What steps has the RBI taken to deepen India’s financial markets and improve liquidity in capital markets?
Ans: Measures include raising IPO financing and loan against shares limits, scrapping caps on loans against debt securities, etc.
Q4: How does RBI’s decision to scrap the 2016 large borrower lending restrictions reflect its evolving regulatory approach?
Ans: It shows a shift from conservative risk aversion to reliance on frameworks like the Large Exposure Framework and macro-prudential tools.
Q5: What are the risks and opportunities of RBI’s twin reforms—corporate takeover financing and rupee internationalisation?
Ans: Opportunities lie in boosting corporate competitiveness, while risks include vulnerability to external financial shocks.
