MUMBAI: India has drawn more than US$50bil from its overseas citizens since June, prompting the central bank to close a special window for attracting foreign-currency deposits a month ahead of schedule.
Banks received US$52.3bil through foreign currency non-resident, or FCNR (B), deposits, as of Aug 13, according to data released by the Reserve Bank of India (RBI) last Friday.
Together with inflows through overseas foreign currency loans and external commercial borrowings, that takes the total to US$56.85bil. The facility was scheduled to close on Sept 30.
The RBI said based on the “encouraging response to the swap facility for FCNR (B) deposits and the resultant foreign-exchange (forex) inflows”, it was decided the measure would be available until Aug 31.
The early deadline indicates that the response to the plan has exceeded the RBI’s estimate, according to Gaura Sen Gupta, chief economist at IDFC FIRST Bank Ltd.
Total inflows under the programme are still expected to be robust at US$70bil, she said.
The RBI said in June it would bear the currency-hedging costs for lenders raising deposits from Indians living overseas and also allow borrowing against such funds.
Banks are vying for those dollars, offering interest rates of as much as 7.75% on five-year deposits to attract capital from the country’s 35 million-strong diaspora.
The inflows provide an additional buffer for the central bank as elevated crude oil prices put pressure on the rupee.
The RBI has been intervening in the forex market over the past week, keeping the dollar-rupee pair in a tight band.
Having ruled out an early closing of the window just a few days back, the RBI surprised traders with its move.
As a result, India’s bond market might see a sell-off, especially at the shorter end, when trading resumes today.
That end of the curve has been a huge beneficiary of increased local liquidity as banks swap dollars for rupees under the RBI’s special window.
“Excess cash was being parked in bonds, especially the short end,” said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank. “With the RBI also taking out the surplus liquidity through reverse repos (repurchase agreements), the premature close of the deposit plan makes the view on liquidity less favourable.”
Pawar said the 10-year bond yield could advance two to three basis points today while those on the five-year could see a sharper rise of five to seven basis points.
Since June, when the RBI’s measures were announced, the yield on five-year notes has dropped around 47 basis points, outpacing a fall of 25 points in 10-year bond yields.
The early closing of the swap window is unlikely to have much of an impact on the rupee, as the programme has raised hefty overseas flows. In addition, sentiment around the currency is being dictated by swings in oil prices. — Bloomberg
