https://www.financialexpress.com/opinion/a-prudent-pause/4319808
That would be broadly in line with economists’ expectations and give the central bank considerably more room to manage the external account and contain excessive volatility in the currency.
Given the overwhelming response to the special foreign currency non-resident (bank) [FCNR(B)] deposit scheme, under which banks have mobilised about $52 billion so far, the Reserve Bank of India (RBI) has done well to advance its closure to August 31. If another $10-15 billion flows in over the next fortnight, the mobilisation would be substantial.
Moreover, the swap facilities for overseas foreign-currency borrowings (OFCBs) and external commercial borrowings (ECBs) remain open until end-December. These routes have so far attracted about $4.5 billion; another $5-6 billion would take the combined inflows under the three schemes past $80 billion.
That would be broadly in line with economists’ expectations and give the central bank considerably more room to manage the external account and contain excessive volatility in the currency.
There is, however, a downside to accumulating too many dollars through such schemes: the repayment obligation three to five years from now, when the deposits begin to mature. The cost of hedging dollars in the forward market may be an affordable 3% today, but there is no knowing how the dollar, crude oil prices, or hedging costs will move in an uncertain global environment, especially with no resolution to the US-Iran conflict in sight.
Taking on an excessive repayment burden would therefore be imprudent. The RBI’s assessment of how much dollar-denominated liability the system can safely absorb deserves due weight. Governor Sanjay Malhotra had indicated at the post-monetary policy interaction on August 5 that the facility would not be withdrawn before the original September 30 deadline.
But the subsequent acceleration in inflows may have prompted the central bank to reassess the balance between immediate benefits and future risks. It would nevertheless help if the RBI explained the basis for the change more fully, particularly since banks had planned their mobilisation efforts around the original deadline.
Having demonstrated the scheme’s ability to attract dollars quickly it can, of course, be reopened if circumstances warrant, rather than accumulating more liabilities than are currently needed.
Currency markets were somewhat disappointed by the shortening of the FCNR(B) window: the rupee weakened by about 17 paise against the dollar on Monday morning. Yet inflows of $65-70 billion through this route would still constitute a tidy sum, with more likely through the other windows.
After touching an all-time low of 96.90 to the dollar in May, the rupee should now, barring fresh shocks, follow a more orderly trajectory. Reports suggest that the RBI has already deployed some of the new inflows to contain currency volatility, helping explain the rupee’s narrow trading range.
Bloomberg data show that its swings have fallen to a six-month low despite crude oil prices climbing back to about $88 a barrel. If the rupee has not appreciated as much as some market participants expected, it is partly because the RBI has used the inflows to rebuild its reserves.
These rose from about $680 billion in May to $707 billion on August 7. At the same time, the central bank’s forward dollar sales remain elevated at about $80 billion, leaving little room for complacency.
The more reassuring development is that the balance of payments is now expected to record a surplus of $40-100 billion in FY27, despite an $8.1-billion deficit in the April-June quarter. Global risks remain formidable, but the inflows have strengthened India’s external buffers considerably. By closing the window early, the RBI is sensibly choosing not to stretch that advantage too far.
© The Indian Express (P) Ltd
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