FCNR Redemption may Cause Only Transient Disruptions

The $26-billion foreign currency non-resident (FCNR) deposits, raised during the last months of 2013, are due for redemption over the months of SeptemberDecember 2016. A recurring question at the recent RBI post- policy interactions, reflecting market concerns, was the potential disruptions in liquidity and foreign exchange.
RBI statements have already indicated that chances of a severe disruption are low. Although there are risks, we too think these are likely to be small. India’s current account deficit (CAD) had touched 6.5% of GDP in the October–December quarter of FY13. This deficit was partially financed by a surge in portfolio flows, with a delta of almost $26 billion in FY13. India’s external fault lines were exposed with the global “taper tantrum” following Bernanke’s comments on QE withdrawal. The rupee dropped from an average of 55/$ in May ’13 to 63.8 in September. FPI outflows over May to August ’13 were over $7 billion, and RBI’s foreign exchange reserves fell from $264 billion in April to $247 billion in August ’13.
To stabilise markets, RBI proposed tapping the NRI diaspora for FCNR deposits, offering a swap deal at concessional swap rates for fresh dollar deposits of tenor 3 years and above. The following legs outline the details of the transactions, with associated changes in foreign exchange and rupee liquidity flows. Read More…