Noida, Sep 4 (APAC Media): The Reserve Bank of India (RBI) could face a bill of about $11 billion from a programme aimed at attracting foreign-currency deposits, as the central bank grapples with the cost of providing banks with favourable hedging arrangements, according to Bloomberg.
The RBI’s special window drew a record $127.23 billion through Foreign Currency Non-Resident (Bank), or FCNR(B), deposits, significantly exceeding its initial estimate of $80 billion.
The programme was launched in June as the Indian rupee faced pressure. Under the arrangement, the central bank provided banks with access to a cheaper currency hedge, encouraging them to bring more dollars into the country.
Including $9.15 billion raised through overseas foreign-currency debt and external commercial borrowings, the measures generated total inflows of about $136.4 billion.
The scale of the inflows, however, has raised questions over the cost to the RBI.
The central bank’s hedging arrangement is estimated to cost around 3% to 3.5% a year over a period of three to five years. The RBI also has to manage the rupee liquidity created when banks exchange the foreign currency with the central bank.
Madhavi Arora, an economist at Emkay Global Financial Services, estimated that the combined cost of hedging and liquidity management could reach about 1.2 trillion rupees ($12.7 billion) over five years.
“The funds raised, therefore, need to be deployed judiciously and productively to mitigate these first-order and second-order fiscal costs,” Arora said.
The eventual cost to the RBI could nevertheless be lower if the central bank earns strong returns by investing the foreign currency it receives.
Gaura Sengupta, an economist at IDFC First Bank, said the net annual cost could be considerably smaller.
“On a net basis, per year, the cost could be as low as 100 billion rupees, or even marginally positive for the RBI,” Sengupta said.
The inflows have also added to liquidity in India’s banking system. The surplus recently approached 9.7 trillion rupees, increasing pressure on the RBI to absorb excess funds through its liquidity-management operations.
The programme could also have implications for the central bank’s profits and, in turn, its annual dividend to the government.
The RBI transferred a record 2.87 trillion rupees to the government in May, compared with 2.69 trillion rupees a year earlier.
For now, the large foreign-currency inflows have strengthened India’s external liquidity position. The country’s foreign-exchange reserves stood at about $730 billion, providing a substantial buffer against future dollar obligations.
The foreign-deposit programme has therefore achieved its immediate objective of attracting dollars to India, but the RBI now faces the challenge of managing the associated liquidity and financial costs.
The final impact will depend on how the central bank deploys the foreign currency and manages the liquidity generated by the inflows.
News Agency Inputs
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Disclaimer: This article is for informational purposes only and is based on publicly available information. APAC Media is not responsible for investment decisions or losses. Please conduct your own research or consult a financial adviser before investing.
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