FCNR redemption: The long and the short of it

There is considerable worry that these redemptions will create a rupee shortage and a dollar squeeze at different points in time, forcing banks to scout for both currencies


Banks raised $24 billion through FCNR deposits in September 2013 and then swapped these dollars with RBI at a subsidized swap rate.
Banks raised $24 billion through FCNR deposits in September 2013 and then swapped these dollars with RBI at a subsidized swap rate.

The market chatter around the maturing foreign currency non-resident (FCNR) deposits is getting cantankerous again. There is considerable worry that these redemptions will create a rupee shortage and a dollar squeeze at different points in time, forcing banks to scout for both currencies.

There is also an argument that the Reserve Bank of India (RBI) has not helped the market to tide over this fully. A lot of this seems noise given that the rupee has depreciated a measly 0.3% since September.

Banks raised $24 billion through FCNR deposits in September 2013 and then swapped these dollars with RBI at a subsidized swap rate. Basically, banks borrowed dollars from customers, which they then gave to the regulator with an eye on a nice margin. The time now has come for RBI to return these greenbacks to banks and for banks to return them to the customers from whom they borrowed.

This is simple and there are no hiccups seen in this. But there is more. The central bank, to avoid a sharp dip in its foreign exchange reserves once it starts returning dollars to the banks, had bought greenbacks through forward contracts from the forex market. These are the “long” positions of RBI that everybody refers to. In August, these positions in one-three months tenure were $12.9 billion.

What seems to perturb the market is that these are only $12.9 billion while FCNR outflow totals around $22 billion. Essentially, RBI should have had a “long” position of $10 billion more. In the past RBI has given ample warnings it would help but not handhold banks during FCNR redemptions.

So, while banks could be “short” of dollars over the next few weeks, there are enough ways to borrow greenbacks. Fresh FCNR deposits could be raised (around 2%) or short-term dollar loans could be taken that are even cheaper. Granted, these entail a cost, but banks would do well to manage it than raise the level of worry in the market.

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