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Swap window for NRI deposits to boost forex reserves

Move to encourage banks to raise such deposits as their cost of funds fall by at least 2.5%

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The Reserve Bank of India's (RBI) move to offer a concessional window to banks to swap fresh Foreign Currency Non-Resident (Bank) or dollar funds will boost the foreign exchange reserves to the tune of $ 10 billion, rough estimates suggest.
 
The move will encourage the banks to raise such deposits as their cost of funds will by at least 2.5%. In addition, recently RBI has provided a dispensation to banks that they will not have to maintain cash reserve ratio and statutory liquidity ratio for incremental FCNR (B) deposits. The swap facility is available to the banks till November 30.
 
“Banks are raising these deposits from NRIs at Libor/swap rate plus 400bp. The cost of FCNR(B) deposit mobilization works out to about 8.5 %. If banks lend at, say, 11%, they will likely make the entire 250 bps spread as FCNR(B) deposits will not attract CRR or SLR for now,” said Indranil Sengupta, India Economist, Bank of America Merrill Mynch.
 
“The most important near-term move is to allow banks to swap their dollar liabilities against FCNR(B) deposits at 3.5 % per  annum for three years. This, along with a few other measures, could attract USD10bn of inflows in next three months, on our estimates, and could be a material near-term positive for the rupee,” said economists Siddhartha Sanyal and Rahul Bajoria of Barclays.
 
The central bank has also increased bank's overseas borrowing limit of unimpaired Tier I capital to 100 %, from 50 % earlier is set to attract dollar inflows into the country. The borrowing mobilization can be swapped with the RBI at 100 bps lower than the market rate.
 
According to a report by YES Bank, this step creates a potential room for the banking system to raise approximately $30 billion.
 
So far in the street there were concerns on attracting capital inflows into the country as Foreign Institutional Investors (FIIs) have been selling their holding in domestic market. This resulted in weakness of the rupee which has already dropped by almost 22 % against the dollar so far in the current financial year.
 
“On the capital account, the announcement of swap windows for FCNR (B) deposits and banks’ overseas borrowing (up to 100 % of Tier 1 capital) are likely to result in incremental dollar inflows into India. We estimate that $15-20 billion inflows can result from these measures and this can go some way towards plugging the BoP shortfall expected in the current financial year,” said A Prasanna, chief economist, ICICI Securities Primary Dealership in a note to clients.
 
Data from Securities Exchange Board of India (SEBI) shows that in the current fiscal so far net FII outflows have been $ 5,973 million from domestic market.
 

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Swap window for NRI deposits to boost forex reserves

Move to encourage banks to raise such deposits as their cost of funds fall by at least 2.5%

Move to encourage banks to raise such deposits as their cost of funds fall by at least 2.5%
The Reserve Bank of India's (RBI) move to offer a concessional window to banks to swap fresh Foreign Currency Non-Resident (Bank) or dollar funds will boost the foreign exchange reserves to the tune of $ 10 billion, rough estimates suggest.
 
The move will encourage the banks to raise such deposits as their cost of funds will by at least 2.5%. In addition, recently RBI has provided a dispensation to banks that they will not have to maintain cash reserve ratio and statutory liquidity ratio for incremental FCNR (B) deposits. The swap facility is available to the banks till November 30.
 
“Banks are raising these deposits from NRIs at Libor/swap rate plus 400bp. The cost of FCNR(B) deposit mobilization works out to about 8.5 %. If banks lend at, say, 11%, they will likely make the entire 250 bps spread as FCNR(B) deposits will not attract CRR or SLR for now,” said Indranil Sengupta, India Economist, Bank of America Merrill Mynch.
 
“The most important near-term move is to allow banks to swap their dollar liabilities against FCNR(B) deposits at 3.5 % per  annum for three years. This, along with a few other measures, could attract USD10bn of inflows in next three months, on our estimates, and could be a material near-term positive for the rupee,” said economists Siddhartha Sanyal and Rahul Bajoria of Barclays.
 
The central bank has also increased bank's overseas borrowing limit of unimpaired Tier I capital to 100 %, from 50 % earlier is set to attract dollar inflows into the country. The borrowing mobilization can be swapped with the RBI at 100 bps lower than the market rate.
 
According to a report by YES Bank, this step creates a potential room for the banking system to raise approximately $30 billion.
 
So far in the street there were concerns on attracting capital inflows into the country as Foreign Institutional Investors (FIIs) have been selling their holding in domestic market. This resulted in weakness of the rupee which has already dropped by almost 22 % against the dollar so far in the current financial year.
 
“On the capital account, the announcement of swap windows for FCNR (B) deposits and banks’ overseas borrowing (up to 100 % of Tier 1 capital) are likely to result in incremental dollar inflows into India. We estimate that $15-20 billion inflows can result from these measures and this can go some way towards plugging the BoP shortfall expected in the current financial year,” said A Prasanna, chief economist, ICICI Securities Primary Dealership in a note to clients.
 
Data from Securities Exchange Board of India (SEBI) shows that in the current fiscal so far net FII outflows have been $ 5,973 million from domestic market.
 
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