India Starts FCNR Maturity Payouts With Minimal Market Impact

As India gears up to handle one of the most significant financial events of this year, the redemption of $25 billion in foreign currency deposits raised three years ago, market experts have said that any impact on the Indian rupee is likely to be minimal and temporary.

According to data published by India’s central bank, the Reserve Bank of India (RBI), the country’s foreign exchange reserves saw a drop of $4.34 billion reaching $367.64 billion in the first week of October. The foreign exchange reserve was at an all-time high of $371.99 billion at the end of September.

The decline for the week ending October 7 was due to a fall in foreign currency assets. The value of gold assets remained unchanged at $21.40 billion. Although RBI does not issue explanatory notes to its data, the sharp decline has been attributed to pay-outs related to the maturing of the foreign currency non-resident (FCNR) deposits having a three-year term.

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Ananth Narayan, co-Head of Wholesale Banking-South Asia, Standard Chartered Bank said that the issue was not a concern to the markets since the RBI is well equipped to handle the matter. He observed that the RBI was managing the situation closely and with care, pointing out that the payments were already ongoing yet hardly any repercussions had been noticed in the foreign market.

According to Narayan, the RBI has enough dollars in its coffers to make these payments. He stated that the central bank had taken early delivery of its prior dollar purchases and had forward purchases of dollars as well. A few market experts had earlier issued warnings to expect some volatility.

In a statement, Radhika Rao, economist, group research at DBS Bank said

Some $25 billion in foreign currency non-resident or FCNR (B) deposits raised to stabilize the rupee in 2013 will be maturing in Sep-Nov. About four-fifths of these deposits are unlikely to be rolled over, which in turn, could result in $20 billion in outflows. Expect some short-term impact on the balance of payments, strain on domestic liquidity conditions and a temporary bout of rupee volatility

In her June note, Rao had noted that around $24-25 billion of the total $34 billion raised were FCNR (B) deposits which banks had swapped with RBI for attractive rates. At maturity, the banks would be returning the rupees to the RBI, thereby getting back their dollars deposits plus requisite interest.

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