FCNR redemption pressures will be transient: BNP Paribas

It said that the RBI will dip into foreign exchange reserves to smoothen the volatility

Any disturbances in the market due to the upcoming Foreign Currency Non Resident Bank account (FCNR(B)) redemptions will only be transient as the Reserve Bank of India will dip into foreign exchange reserves to smoothen the volatility, French brokerage BNP Paribas said on Friday.

"While some disturbances are expected, they are likely to prove transient," it said in a note, adding that the RBI will temporarily draw down its reserves to smoothen market volatility.

The note said at $366 billion, the forex reserves are $40 billion above the top end of the range suggested by the International Monetary Fund as being essential for the country to respond to shocks and prevent disorderly market conditions and undue economic dislocation.

 

It added that the RBI has been buying dollars in the forwards market intending to neutralise the redemptions by banks' dollar delivery under the forwards deals at maturity.

The RBI had opened a special dollar swap window in the aftermath of the pressures on currency following the taper tantrums of 2013, under which banks had raised $27 billion in three-year foreign currency deposits from the diaspora which are up for redemptions between September and November.

The RBI has said that it expects an outflow of up to $20 billion because of the redemptions and has stressed on being able to manage it through its forward contracts and the reserves.

"But mismatches in the profiles of its (RBI's) forwards and FCNR(B) deposits are conceivable," the note said, adding that the redemptions can also also temporarily crimp the financial account under the balance of payments.

The brokerage, however, joined its peers in expecting the country to report a current account surplus for the first quarter of the financial year 2016-17 at $1 billion or 0.2 per cent of the gross domestic product (GDP).

"It would be the first quarterly surplus India has chalked up on its current account since Q4 of the FY 2007," it said.

Japanese brokerage Nomura had last week estimated the country to report a surplus of $4 billion or 0.8 per cent of the GDP for the April-June period on a sharp narrowing of the merchandise trade deficit.

Meanwhile, on GDP growth data, BNP Paribas said the first quarter number of 7.1 per cent was lower than expected but stressed that the number is inconsequential as growth will pick up in the remainder of the fiscal on rural economy's revival and benefits of the 7th Pay Commission award.