Indian banks have quietly redeemed close to 90 per cent of Foreign Currency Non-Resident-B (FCNR-B) deposits by November end even as they struggled to handle the fall-out of the government’s decision to scrap high value notes of the denomination of Rs 500 and Rs 1,000.
Local banks had mobilised close to $26 billion of FCNR-B deposits during the currency crisis in 2013 to bolster the currency when the Indian rupee came under attack as the twin deficits — both fiscal and on the current account widened. These deposits were due for redemption this year — in November 2016 and a portion of it next month.
Banks have redeemed over 90 per cent of these without the exercise creating volatility in the foreign exchange market, bankers said. Now that the hump in redemptions is over, the local currency could be more stable, bankers said.
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“The banking system witnessed outflows of $2-3 billion outflows in the last couple of weeks on account of FCNR redemptions,” said a senior banker.
The rupee had seen some volatility and slid to an intra-day low of 68.86 last week — a fall of close to 3 per cent during the month — in the wake of capital outflows. The election of Donald Trump as US President and the US Federal Reserve’s likely move to raise interest rates also added pressure on outflows and the rupee. Foreign investors have pulled out a record $5 billion from India in November. Bankers said a chunk of FCNR money would have remained within the country.
“Historically November has been one of the weaker months for the rupee and in this year the currency was also weighed down by the FCNR redemption,” said Abhishek Goenka, CEO, IFA Global.
On Wednesday, the rupee closed stronger by 27 paise against the US dollar at 68.38/39 per dollar against the previous close of 68.65 per dollar. Last week, the money market witnessed a huge surplus despite outflows suggesting a tightening of liquidity conditions this week given the heavy auction and FCNR related outflows. In 2013, when the currency came under attack, and the current account deficit and fiscal deficit widened, in the terminal year of the UPA government, one of the first announcements by Raghuram Rajan on the first day of taking over as RBI Governor was that the central bank would offer a special concessional window for FCNR-B deposits.
To bolster the rupee, the RBI offered to swap these funds for a minimum of three years at a fixed rate of 3.5 per cent, leading to inflows of $34 billion, and helping stabilise the currency. Before demitting office in September this year, Rajan had said that he thought the idea to be “completely idiotic” as it was akin to giving 3.5 per cent subsidy to bankers and it was “the worst of the ideas on the table” which made him request former Governor D Subbarao to announce it while departing on September 4, 2016. However, Subbarao told him to announce the measures. The scheme changed the course of the rupee which was bleeding following the ‘taper tantrums’.
On the cost-benefit analysis front, the scheme has worked out very well and the country had made money. Against the cost of up to Rs 20,000 crore to get the deposits, the country benefited through stabilisation of rupee, which helped reduce imports by up to Rs 1.6 trillion per year through the Rs 4 reduction in the value of the rupee.