The Reserve Bank of India’s decision to close its special FCNR(B) swap window ahead of schedule has shifted attention towards the central bank’s exchange-rate strategy and the risks emerging from global markets, according to SBI Research’s latest Ecowrap report.
The report estimates that banks could mobilise around $65-70 billion through FCNR(B) deposits. If overseas foreign currency bonds and external commercial borrowings (ECBs) are also taken into account, the overall mobilisation could rise to $80-85 billion.
SBI Research argued that the cost of hedging these deposits should not pose a significant challenge for the RBI. Assuming an average annual USD/INR hedging cost of 3%, the cumulative cost over five years on a $70-billion deposit base would be approximately $10.5 billion.
Rupee Gains Remain Limited Despite FCNR(B) Measures
The report noted that the estimated hedging expense would represent only around 1.45% of India’s current foreign exchange reserves of nearly $700 billion. Against projected reserves of $800 billion in five years, the cost would amount to approximately 1.27%, making the burden relatively small.
SBI Research also pointed to the limited impact of the FCNR(B) measures on the rupee. The currency appreciated by only 0.1% between June 8, when the swap programme began, and August 17.
The brokerage expects the rupee to strengthen towards 95-95.5 per US dollar by August 31, with further appreciation possible thereafter if the experience of the 2013 FCNR(B) scheme is used as a benchmark.
The report recommended that the RBI consider more active and unexpected intervention in the foreign exchange market. Such measures, it said, could help change the prevailing market perception that the rupee has a predominantly depreciating bias.
Global Factors Could Put Pressure on Rupee
SBI Research identified several international developments that could create additional pressure on the Indian currency. The 30-year US Treasury yield has climbed close to 5.3%, its highest level since 2007, amid concerns surrounding the US government's fiscal position.
The report also highlighted the possibility of further Japanese intervention to support the yen. If Japan finances such intervention by selling US Treasury securities, it could push American bond yields higher and potentially increase pressure on emerging-market currencies, including the rupee.
