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 scrambled to handle the after effects of the government’s decision to scrap high value notes of the denomination of Rs 500 and Rs 1000.
Local banks had mobilised close to $26 billion of FCNR-B deposits during the currency crisis in early 2015. This was due for redemption this year – in November 2016 and some of it next month. Banks have redeemed over 90 per cent of the money 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.
The rupee had seen some volatility and slid to an intra-day low of 68.86 last week 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.
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 asked 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.