Redemptions of $26 billion raised in 2013 have started, putting pressure on the rupee
Small tremors over the maturing foreign currency deposits and the obligation to repay the investors in dollars are already being felt by the markets and the Reserve Bank of India (RBI).
On October 7, data from the central bank showed that the reserves fell by $4.32 billion to $367.64 billion, part of which, dealers say, must have gone to repay these deposits.
Bankers say the $7 billion equity infusion by Vodafone which has already come into the country and the $2-3 billion expected to be brought in by Essar Group after the Essar-Rosneft deal may help meet the demand for dollars. This, they say, would partly help the RBI take care of the maturing FCNR (B) deposits without dipping into its reserves.
India has about $26 billion of FCNR (B) deposits maturing in the next two months, small portion of which has already matured. As a result, the currency market in India has been bracing for foreign currency outflows as the three-year foreign currency deposits held by Indian banks, which were sourced from NRIs in 2013, are set to mature between September and December. While the RBI has done all the planning for the repayment, there’s a niggling worry that the outflow could lead to a spike in demand for dollars, possibly leading to rupee volatility.
To prop up a falling currency the regulator had asked banks in 2013 to raise dollars from their customers and the central bank promised to take care of the currency risks. "Banks made money on the scheme and they have the dollars to repay the debt,” said a banker.
A foreign banker said, “The Vodafone money helped the rupee to stay strong in the last few weeks. But it is still uncertain when the Essar money is coming in. But the dollar-flow is coming in from other companies also. Though we expect a bit of volatility in the rupee, much of it will be taken care of by the huge reserves that the RBI has built."
RBI has a forex reserve of $367.64 billion, as of now.
The rupee on Wednesday gained by 5 paise to close at Rs 66.68 to the dollar with the RBI intervention and selling of dollars by exporters. Demand for dollars is expected to shoot up as the large portion of the FCNR(B) deposits will mature by the end of October.
Bankers expect the problem to exacerbate if the exporters do not deliver dollars which would lead to a temporary demand-supply mismatch.
Another senior banker said, “The Vodafone money has already come in. This was giving strength to the rupee for while. When that impact waned the rupee started getting shaky but however gained some ground today. There is a heavy demand for the spot dollars and RBI is selling forwards.”
This resulted in the forward premiums to fall 0.10% to 5.35% from Tuesday’s rates, according to forex dealers. Forward premium is the price paid in currency hedging. It is done by buying dollars in the forward market – the market which promises the delivery of dollars at a pre-determined rate. Usually, forward transactions take place at a premium or discount to the spot rate.
A Mumbai-based forex dealer said, "The RBI was selling forwards in the market. Banks have also been asked by the RBI on the dollar positions to get an estimate of how much of dollar demand would be there in the next two months."
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