You are here: Home » Finance » News » Banks
Business Standard

Experts say FCNR(B) redemption to be smooth

RBI's proactive measures get credit for removing much of the worry


Anup Roy  |  Mumbai 

Outside RBI Headquarters in Mumbai.? Photo: Kamlesh Pednekar
Outside RBI Headquarters in Mumbai. Photo: Kamlesh Pednekar

The market would be closely watching how the Reserve Bank of India (RBI) handles the foreign currency non-resident bank account or FCNR(B) related outflow in September. Even so, a consensus has emerged that when the redemptions happen, it would not be very disruptive.

The central bank’s pro-active role in communicating much in advance about its intent and plan has worked as a balm. The focus has shifted to gauging how much the net outflow would be.

Analysts are not sure but the currency market is anticipating it won’t be more than $10-15 billion when the deposits mature and that this would not create much of a disturbance. After all, most of the deposits were leveraged loans that need to be paid to at the time of maturity.

Indian raised about $34 billion under the scheme, back in 2013, of which $6-7 billion was for their Tier-1 capital needs. The balance $27-28 billion were split into maturities of three and five years, with most of the bonds maturing in the three-year and five-year segments.

RBI has said the amount maturing in the five-year segment is ‘not inconsiderable’, which gives hope that the redemption pressure won’t be acute.

A research note by Edelweiss Research on Tuesday pegged the net outflow at $10-15 billion. As the country generates a steady state balance of payment (BoP) surplus of $5-10 billion under even benign global conditions, the resultant figure, although sizeable, should be manageable, it said.

“It is a one-off, very short-term/temporary and well-anticipated mismatch on the external payments front. Therefore, policy choices will not be as constrained as during a typical BoP shock,” Edelweiss said, even as it anticipated elevated volatility in debt and currency markets around the time of redemptions, making RBI draw-down reserves to curb currency volatility. The liquidity tightness that time would have to be replenished by stepping-up open market purchases.

Currency traders said the market is not very worried about the situation as the central bank has already communicated its intent to handle the situation and as such, even short-term volatilities at the time of maturity should reverse within a few days.

The central bank had said in its monetary policy review on April 5 that it was fully prepared for any volatility. Later, it said in a statement on its website that it had entered into currency swaps and forwards, and that should take care of the dollar requirement and be neutral for the reserves.

Assuring the market that the swaps were adequately covered by RBI’s forward purchases, the central bank, however, added a caution.

“The forward purchases and the FCNR(B) swaps are not exactly synchronous in terms of maturity bands. Since the forward purchases are largely front-running the FCNR(B) swaps with regard to maturity, the foreign exchange reserves will, in all likelihood, witness significant accretions initially to be followed by depletions of more or less similar magnitude around the time these deposits mature.”

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Sat, April 30 2016. 21:12 IST