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  1. India faces prospect of $20 bn in outflows; here’s why Raghuram Rajan is concerned

India faces prospect of $20 bn in outflows; here’s why Raghuram Rajan is concerned

The Reserve Bank of India (RBI) on Tuesday said it doesn’t expect the leveraged portion of the total FCNR (B) deposits of $26 billion, up for renewal...

By: | Mumbai | Published: June 8, 2016 7:13 AM

The Reserve Bank of India (RBI) on Tuesday said it doesn’t expect the leveraged portion of the total FCNR (B) deposits of $26 billion, up for renewal later this year, to be redeemed and estimates about $20 billion of outflows.

RBI governor Raghuram Rajan observed that while it might intervene in the currency markets to prevent any extreme volatility, in the wake of the maturing foreign currency non resident (Bank) (FCNR B) deposits, no one should take the central bank for granted. “There are some concerns on the maturing FCNR(B) deposits. If there is a dollar shortage we may supply some but no one should take it for granted,” the governor said addressing a media conference.

The governor explained the central bank had hedged its obligations via forward contracts but some of its counter-parties had expressed apprehensions of being able to honour the commitments. “This is something we will monitor,” Rajan said.

With the Indian rupee in free fall around August, 2013, Rajan, in one of his first policy decisions after assuming office, had allowed banks to swap new

FCNR (B) deposits with the RBI at a fixed rate of 3.5%. The alternative would have been for banks to hedge the currency risk at market -determined rates, of around 6%. At an interest rate of 4% on the deposits,it would have been difficult for banks to lend the funds. However, at a swap rate of 3.5%, the total cost of about 7.5% was affordable.

Hitendra Dave, Head, Global Banking and Markets for India, HSBC Holdings observes there are some concerns on dollar liquidity because while RBI will take full delivery of $24 billion some of the parties who need to deliver the dollars to the banks may not deliver the entire quantity.

Dave, however, believes this would not cause too much volatility.

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