With foreign currency non-resident (bank) – FCNR(B) -- deposits taken by banks in 2013 under a special scheme maturing from September, the Reserve Bank of India once again reiterated that it will be monitoring the markets and do what is necessary to minimize volatility in the exchange rate.

According to RBI Governor Raghuram Rajan, $26 billion had come in as FCNR(B) deposits under the special scheme. It was meant to help banks bring in safe money to fund the current account deficit

Under the scheme, the RBI had, in September 2013, opened a window for the banks to swap fresh FCNR (B) dollar funds, mobilised for a minimum tenor of three years and over, at a fixed rate of 3.5 per cent per annum for the tenor of the deposit. The RBI had shut the swap window for FCNR deposits in November 2013.

The money that flowed into FCNR(B) deposits, included those from Non-Resident Indians and Persons of Indian Origin who had borrowed money and invested.

“Now let us assume all of it goes out. We have covered 80 per cent of it in forward markets and we have $365 billion, as of last count, in forex reserves. So, even if all these deposits go out, we can completely pay for it,” explained Rajan.

So, the real question is whether there will be short-term disruptions in the market because, for example, some of the banks who have sold forward contracts to RBI find that they are not able to realize dollars from elsewhere.

“We will be monitoring the markets. We don’t want to give a blanket guarantee that there will be no volatility. We want banks to be prepared to deliver to us. But if there is volatility we will do what is necessary,” said the Governor.

As the RBI has reiterated in the past, Rajan emphasized that it do not see the FCNR(B) repayments as disruptive. With the preparation the central bank has made, and good management, redemptions should go smoothly, he said.

Published on August 9, 2016