Rajan says nothing to worry about FCNR deposit redemptions

RBI Governor Raghuram Rajan today allayed fears of any "disruptive" impact on markets due to the redemption in coming months from USD 26 billion foreign currency deposits, calling it a "smaller eventuality".
Separately, RBI announced pumping in of Rs 10,000 crore through open market purchase of government securities to meet the perceived liquidity crunch due to the upcoming redemption.
"I think in relative terms, the FCNR(B) redemptions should be seen as much smaller eventuality. Not only do we have forward positions, we also have plenty of reserves," he told researchers and analysts in a concall.
When the rupee had a freefall due to the 'taper tantrums' in the summer of 2013, plummeting to lifetime low of 68.85 on August 28, RBI under Rajan had mobilised USD 26 billion via FCNR-B deposits by offering a special three-year swap window to banks, which are maturing from next month.

While talking to reporters earlier today, Rajan said he does not see the FCNR-B repayments as disruptive. "With the preparation we have made and good management, redemption should go smoothly," he said.
Rajan said RBI has covered 80 per cent of these deposits in forwards markets and has USD 365 billion of forex reserves.

"So even if it all goes out, we can completely pay for it," he said.
"We will be monitoring the markets. We do not want to give a blanket guarantee that there will be no volatility. We want banks to be prepared to deliver to us. But if there is volatility, we will do what is necessary," he told reporters.

On whether the outflow can result in rupee depreciation like in August 2013, he said the current environment is greatly different from the situation two years back, when there were concerns about macro stability and the global environment, which had affected many other emerging markets.
"I think we are very-very far away from the taper-tantrum period," he said.
When asked whether RBI is looking at reopening up FCNR-B window to garner fresh deposit this year to make up for the possible dollar shortfall due to the redemption of older deposits, Rajan said, "Absolutely not."
The Governor also said the country is well buffered to withstand any kind of external threats but may suffer in case there is too much global volatility.

"I think we are well buffered but I won't say we are perfectly buffered. We will suffer volatility when the rest of the world suffers volatility," Rajan told analysts.
Stating that it is very hard to give a firm view on the stability of capital inflows as it depends on external factors, Rajan said, "There are sufficient geo-political and financial market concerns for anybody to be a little aggressive and stick their neck out and say there will be no volatility. In fact, the opposite is probably true. There will be volatility.