The Reserve Bank of India’s decision to prematurely close the special FCNR(B) swap window should shift the focus towards the exchange-rate management and emerging global risks, SBI Research said in its latest Ecowrap.
The report has estimated that total FCNR(B) mobilisation could reach $65-70 billion. When overseas foreign currency bonds and ECBs are included, the number could touch $80-85 billion.
The report said the cost of hedging deposits should not be a major constraint for the central bank. Assuming an average USD/INR hedging cost of 3% a year, the five-year cumulative cost on a $70-billion corpus would be around $10.5 billion. This would amount to 1.45% of India’s current foreign exchange reserves of around $700 billion and 1.27% of projected reserves of $800 billion in five years, it said.
“With current reserves at around $700 billion and incremental reserve accumulation assumed at roughly $20 billion annually, the five-year cumulative hedging cost of $10.5 billion would amount to only 1.45% of the current reserve stock and around 1.27% of the projected reserve stock. This is minimal,” the report said.
It also said the rupee’s response to the FCNR(B) measures has been “surprisingly minimal”. The currency has appreciated just 0.1% between June 8, when the swap scheme began, and August 17.
“We believe that going forward, the rupee could appreciate in the range of 95- 95.5 till August 31 and beyond thereafter if we draw parallels with the 2013 scheme,” the report said. It urged the RBI to consider activist and surprise intervention strategies to correct a market perception that the rupee has only a depreciating bias.
SBI Research has flagged three global risks that could put pressure on the rupee. The 30-year US Treasury yield has risen to nearly 5.3%, its highest level since 2007, amid concerns over the US fiscal outlook. It also highlighted US intervention to support the yen and warned that any further Japanese intervention funded through US Treasury sales could push US yields higher.