RBI restraint on forex mkt was credit-positive

The Reserve Bank of India's (RBI) restraint on intervention in foreign exchange is credit-positive, as it has avoided depletion in foreign exchange reserves and a distortion in the adjustment of companies to global market risks, Moody's Investor Services said on Monday.

“Had authorities used official reserves to maintain the exchange rate at a level higher than dictated by market forces, they would have assisted importers and foreign borrowers at the expense of exporters and import-competing domestic producers,” the rating agency said in a report. It added companies must consider exchange rate risks along with interest rate benefits before borrowing dollar loans.

The agency pointed out companies' dollar borrowings had significantly increased over the last few years and such borrowings had funded imports.

The sharp fall in the rupee had triggered demands for aggressive intervention by RBI, as a weak currency makes imports costlier and adds to inflationary pressures in the economy.

Moody's said an intervention would have depleted RBI's foreign exchange reserves and would not have effectively arrested the rupee's fall because the fall had resulted from global risk aversion and the country's wide current account deficit. The rating agency expects the weak rupee to continue to offset some of the benefits on inflation.

RBI's recent relaxations in external commercial borrowings norms and those for non-resident Indian deposits may attract capital flows, albeit marginally, the report said. Last week, RBI had allowed companies to pay an all-in-cost interest rate of 350 basis points above the London inter-bank offered rate (Libor), up from the earlier 300 basis points above the Libor, thus helping companies find lenders more easily. The central bank also allowed banks to offer a higher interest rate on deposits of non-resident Indians (NRIs) to attract more dollars. This decision would, however, put additional burden on banks.

“This naturally translates into an increased burden on Indian banks in repaying NRI deposits. Such additional burden works out to $ 9.47 billion,” SMC Global said in a research report. According to the report, the additional burden is a significant amount, as it works out to about 9.61 per cent of the total net worth of the Indian banking system. As on June 30, total NRI deposits with all Indian banks stood at about $ 52.897 billion.

“Of the $52.897 billion of NRI deposits, about $43.434 billion is in the nature of 'short term'. This means these short-term deposits would mature by June 30, 2012. If the rupee weakness persists, then such short-term deposits may not be renewed (by NRIs) and may need to be redeemed,” the report said.