In FY14, banks had raised a record $27 billion through the FCNR(B) route after the RBI removed interest rate caps and also offered banks a 3.5% interest rate subsidy to prevent the rupee’s rout.
The desired outcome of the latest central bank move to mobilise foreign currency deposits from the Indian diaspora to arrest the rupee‘s slide must await further policy rate increases at home, with the current arithmetic evidently tilting the balance in favour of domestic savers that local banks will find more attractive to tap.
On Wednesday, the Reserve Bank of India (RBI) announced a raft of measures to arrest the slide in the rupee that nearly fell to the 80 mark to the dollar, a lifetime low for the unit. Among the measures announced was removal of interest rate caps on FCNR(B) (foreign currency non-resident bank) and NRE deposits and exemption for banks from the incremental deposits raised through these routes in their non-interest bearing cash reserve ratio (CRR) calculations. These rules will remain in force until October 31.
Bankers said the measures are pre-emptive, but might not immediately entice lenders to attract more dollar deposits.
“The after-hedging cost of FCNR(B) deposits is 1 to 1.5 percentage points higher than the prevalent rupee deposit rate, making it unattractive for banks,” said Ashish Vaidya, managing director, treasury, DBS Bank India.
No Interest Rate Subsidy
“But things could change in a few weeks as rates are only headed higher, which could make these deposits more viable,” he said.
Currently, the cost of one-year rupee term deposits is in the vicinity of 6%. By contrast, after considering overseas benchmark rates, cost of hedging and the premium charged by banks, FCNR(B) deposits could cost 7% to 7.5%, clearly suggesting a business case for local savings.
Furthermore, unlike last time when such a scheme was announced in 2013, this time there is no RBI support to banks in the form of subsidies to keep costs lower. In FY14, banks had raised a record $27 billion through the FCNR(B) route after the RBI removed interest rate caps and also offered banks a 3.5% interest rate subsidy to prevent the rupee's rout.
Bankers said that although the rupee is under pressure
currently, the crisis is not as acute as it was in 2013, with the rupee losing about 6% of its value in 2022. India is also not among the worst performing emerging market currencies and its foreign exchange reserves of $593 billion are more than double of what they were in 2013.
Bankers said the RBI could tweak its measures and provide banks some more support to make the schemes more attractive.
“It is a step in the right direction and a positive move. Yes, according to the calculations currently, it may not be feasible for banks to raise these deposits but the RBI always has the option to add more incentives and make it more attractive,” said KK Tarania, head of treasury at
NSE -1.13 %. “So, it is early days to gauge the success (of these measures).”
In a note published Thursday, Kotak Institutional Equities said the RBI measures signalled a stronger intent in addressing the current dollar shortage.
“While we are cautious on the quantum of incremental flows, we see these measures as being pre-emptive in capping any sharp depreciation bias and reducing volatility in the INR,” Kotak said in the note. “We continue to see USD-INR within 78.5-80 in the near term. We note that the fundamentals continue to weigh on the INR. However, the RBI will endeavour to ensure an orderly depreciation.”