Bankers say extended FCNR-B facility makes little sense

To arrest the rupee fall, RBI on Aug 14 deregulated interest rates on FCNR-B deposits till Nov 30

There may not be many takers to RBI's extending deregulated interest rate regime for foreign currency non-resident bank (FCNR-B) deposits as the regulator on the hand has discontinued the limited period concessional swap window for NRI funds, say bankers.

In a notification issued last weekend, the Reserve Bank of (RBI) had extended the deregulated interest rate regime on FCNR-B deposits for one-to-three-year and three-to-five-year maturities to January 31 from November 30.

"Certainly, in the absence of the concessional swap window, it will be expensive and we will see FCNR-B deposits accretion slowing down," Abraham Chacko, Executive Director, Federal Bank, told PTI.

To arrest the rupee fall, RBI on August 14 deregulated interest rates on FCNR-B deposits till November 30.

The RBI announced a swap window for foreign currency non-resident (bank) deposits on September 4, as part of its measures to shore up rupee which declined about 30% against the US dollar between April and August.

The special window allowed banks to swap fresh FCNR (B) dollar funds, mobilised for a minimum tenor of three years, at a fixed rate of 3.5% per annum.

The central bank tapered off this concessional swap window after mopping up USD 34 billion.

Most bankers said the concessional widow helped them swap the funds raised from the FCNR-B route, thereby gaining on the interest rate front. With the concessional facility now over, bankers now feel there is no advantage in availing of the extended facility.

Dhanlaxmi Bank Executive Vice-president for treasury Srinivasa Raghavan said: "If banks go for a market swap their cost of funds will be higher, (in the absence of the concessional swap facility)."

Bankers also believe there is a possibility that banks may lower their FCNR-B deposits rates going forward.

The RBI had also allowed banks to borrow up to 100% of their tier-I capital from overseas, which can be swapped with the central bank at a concessional rate of 100 basis points below the ongoing swap rate prevailing in the market.

Experts feel further mobilisation of FCNR-B deposits, in absence of RBI's swap window, will depend on banks capability to absorb higher cost of funds and their requirement.

"It will all depend on banks whether they can absorb higher cost of funds," Dhanlaxmi Bank's Raghavan said.

He further said larger banks can absorb higher cost of funds but it will be difficult for medium and smaller ones.

"Definitely, the deluge of inflows which we saw between September and November will not be there, but it (mobilisation of FCNR-B deposits) will now depend on banks to banks and on the hedging cost which they will be getting," said Harihar Krishnamoorthy, head of treasury at FirstRand Bank.

Earlier this week, the RBI said that the two swap windows have mobilized a sum of $34 billion.

The RBI also said since the swap windows are closed, so going forward any new funds raised from FCNR deposits or from banks' borrowings will flow directly into the market instead of to RBI's FX reserves.