SBI Research suggests that the Reserve Bank of India’s recent closure of the FCNR(B) swap window was not primarily influenced by hedging costs, despite expectations of substantial inflows and shifts in risk dynamics for investors.
SBI Research has said the Reserve Bank of India’s cost of supporting its FCNR(B) swap window is unlikely to have been the main reason the central bank cut short the scheme for new deposits. In its latest Ecowrap report, the bank’s research arm argued that while the hedging bill could add up over time, it would still be modest compared with India’s foreign exchange reserves. The RBI announced on August 14 that the window for fresh FCNR(B) deposits under the special swap arrangement would close on August 31, rather than September 30.
The SBI report estimated the cumulative hedging cost at about $10.5 billion over five years, but said that figure should be seen against the scale of the reserve buffer. The special facility allows banks to mobilise fresh foreign currency non-resident deposits and swap the proceeds with the RBI, lowering the hedging burden and making it easier for banks to offer attractive rates on three- to five-year money, according to operational details published by the central bank and market explainers from lenders and brokerages.
That has fuelled comparisons with the RBI’s 2013 effort to draw in dollar deposits during a period of pressure on the rupee. But analysts quoted by Financial Express said the economics are different this time: borrowing costs are much closer to deposit returns, which reduces the arbitrage that once made the trade more compelling for non-resident Indians. In effect, more of the risk now sits with the investor than in the earlier episode.
Even so, bankers still expect the scheme to pull in substantial money. ICICI Direct said lenders could see $35 billion to $40 billion of inflows, versus roughly $26 billion under the comparable 2016 facility. The same report said the RBI’s swap support translates into a hedging cost concession of around 280 to 300 basis points, and the deposits are exempt from cash reserve ratio and statutory liquidity ratio requirements, making the structure attractive for banks seeking longer-term foreign currency liabilities.
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