Why did the rupee turn?

The rupee responded immediately to RBI governor’s measure to augment NRI deposits by bringing down the cost of hedging dollar deposits to 3.5%
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First Published: Sun, Sep 08 2013. 11 27 PM IST
Photo: Mint
Photo: Mint
The rupee responded immediately to RBI governor Raghuram Rajan’s measure to augment non-resident Indian deposits by bringing down the cost of hedging dollar deposits to 3.5% from the market rate of around 7%. According to Barclays Emerging Markets Research, here’s how it works: Banks gather Foreign Currency Non-Resident (FCNR) deposits at London Interbank Offered Rate (Libor) plus to 4 percentage points; they convert these dollar inflows into rupee liquidity; banks get the option of hedging th
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ese dollar liabilities at a flat rate of 3.5% per annum (against market hedging rates of 6-8% a year); banks’ effective rupee liquidity cost turns out to be around 8.5% per annum; foreign exchange reserves rise by around $10 billion (the amount estimated to be added to FCNR deposits), giving RBI further ammunition to use in stabilizing forex markets, and, therefore, a material near-term positive for the local currency. While estimates of banks’ rupee funding cost for FCNR(B) deposits (NRI deposits in foreign currency) vary between 7.5% and 9%, the fact remains that it has become cheaper. However, SBI Research points out that the maximum incremental addition to FCNR(B) deposits has been $700 million in a month, so hoping for inflows of $10 billion in the next three months is terribly optimistic, especially when total FCNR(B) deposits outstanding are $15 billion.
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First Published: Sun, Sep 08 2013. 11 27 PM IST
More Topics: rupee | Raghuram Rajan | RBI | FCNR | mark to market |
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