Foreign currency non-resident deposits or FCNR (B) maturing in September-November are likely to have an impact on domestic liquidity conditions, reserves accumulation and deposit growth in the second half of the year, says a DBS report.
According to the report, there is a likelihood that the RBI may let long dollar positions unwind to lift foreign reserves until September in preparation for the maturities in 4Q16. “Given the potential dollar outflows, some stress on the balance of payments (BOP) position is expected, but this is likely to be temporary,” it said.
The FCNR-B swap facility was introduced by the central bank during the 2013 currency crisis when the Fed taper concerns had taken the rupee to an all-time low.
“Of the total $34 billion raised, banks mobilised $24-25 billion under the FCNR (B) deposits, which they then swapped with the RBI at attractive rates. This involved the central bank providing rupees in return for dollars to the banks, which will be neutralised at maturity, as the banks return the rupees to the RBI, in exchange for their dollars (plus interest),” the report said.
Since a bulk of the deposits are leveraged, i.e. loans rerouted as deposits, four-fifths of these funds (about $20 billion) are unlikely to be rolled over, amounting to
potential outflows, DBS indicated.
While upcoming redemptions could narrow the financial account (under BoP) by ~1.0% of the GDP in 2H16, they should recover thereafter as normal deposits return, it said.
“Further, a sharp rise in dollar outflows will also put a strain on the domestic rupee liquidity. A circa Rs1.3 trillion (~$20 billion) drain could aggravate the existing liquidity shortage, offsetting the central bank’s efforts to keep systemic liquidity near neutral,” the report said.
So, the upcoming maturity of FCNR (B) deposits is likely to only temporarily unsettle domestic financial markets, DBS said, adding that the RBI has the available policy tools to ensure that this impact does not become enduring.