FCNR deposits maturity could make foreign exchange markets uneasy

Moneylife Digital Team 10 June 2016

Economy & Nation

Around $ 25 - $ 27 billion of foreign currency non-resident (FCNR (B)) deposits are expected to mature from September to November. There is a fear among many market participants that the rupee may become volatile by 2016-end due to the maturity of these deposits, especially if exports continue to decline. According to an SBI report, “Declining export performance could be already adversely affecting the exporters’ ability to handle the currency woes and hence there is the possibility of forward contracts getting rolled over.”

There is a possibility of poor export performance as the global macro-economic environment is weak. India's merchandise exports have been on a declining trend since December 2014. Goods exports from India have declined by around 6.7% to $20.56 billion in April 2016 as compared to the year ago period. The SBI report further states, “It is expected that the expiry of these FCNR (B) deposits will lead to outflow of dollar liquidity from the Indian markets if dollar counter parties (exporters) renege on their commitment.” In such a scenario, the RBI may intervene in the market to provide dollar liquidity from its reserves. This may lead to a liquidity squeeze in the rupee money market. Despite the fact that the RBI has hedged its swap positions, there may be maturity mismatch in these positions. This may lead to disruptions in Indian forex and money markets.

There are many ways to deal with this situation, says SBI. The first option is that the Reserve Bank of India (RBI) will accumulate dollar reserves up to September-November 2016 period. During the period of the maturity of these deposits, it could provide dollars to the market and allow the reserves to dip. The second option is that the Government may issue a Sovereign Dollar Bond to make up for the dollar shortage. It may do so directly or through institutions like India Infrastructure Finance Company Ltd (IIFCL) or Indian Railway Finance Corporation Ltd (IRFC). The third option is to provide relaxation in Cash Reserve Ratio (CRR) during the period of maturity of deposits. For instance, SBI estimates that a 1% reduction in CRR would infuse around Rs1,00,000 crore into the system. Another option is to relax Liquidity coverage ratio (LCR) restrictions during that point of time. RBI may use combination of such measures to counter the problem.

FCNR deposit is a kind of fixed deposit made by non-resident Indians with banks. At present, it is estimated that FCNR deposits account for around 1.7% of the deposits in the banking system. Earlier, in September 2013, during a currency crisis, the RBI had opened a window to banks to swap the fresh FCNR dollar funds in order to protect the falling rupee and build foreign exchange reserves. During the period when the window was open, banks mobilized a huge $34.3 billion and swapped them with the RBI.

Comments

User

Hemant Chitale

10 years ago

The problem is that those FCNR deposits were at much higher interest rates than what would be offered for renewals or new bonds -- unless the RBI were willing to take the risk of higher interest rates again !

MG Warrier

Replied to Hemant Chitale comment 10 years ago

Yes. Interest rates have gone down globally. No denying that the deposits were received at a rate 'above normal'. Now, India has option to repay the deposits when they mature and accept fresh deposits @ present market rates. It was in this context I referred to swelling forex reserves. The worries are overdone by vested interests (including bankers!)

Tikam Patni

10 years ago

With exports falling, corporate capacity utilisation remaining poor, banks facing crisis in stressed assets, and govt remaining engaged in vote politics. ..we are up for very bad days ahead. ..

MG Warrier

10 years ago

Dr Subramanian Swamy reportedly called these deposits due to mature in another six months or so â€˜a time bombâ€™. Perhaps, now on, analysts, economists and media may spend precious time and energy suggesting ways and means to handle the situation. It is their job. Unlike many outside think, banks keep an account of their receipts and payments and there is an ongoing review for Asset-Liability-Management. No deposit matures without the prior knowledge of the individual/institution which has accepted it. RBI Governor has already mentioned that there is no reason for worry about the availability of resources, even if these forex funds flow out of the country, which may not happen. Our Forex reserves position has improved by about $100 billion during the last 3 years or so.