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FCNR Deposit Surge Puts India’s Liquidity Management Under Focus
Banks collected a very large amount of dollars through special FCNR(B) deposits.
The total was much bigger than the amount collected through a similar program in 2013.
This helped India build up its foreign-exchange reserves and supported the rupee.
However, the deposits also put more rupees into the banking system.
Too much available money can push short-term interest rates lower.
The Reserve Bank of India may use tools such as auctions or bond sales to remove some of that extra money.
Raising the cash reserve ratio is another possible option, but it could reduce some benefits given to banks for collecting these deposits.
In three to five years, depositors may take their dollars back, which could create new pressure on the rupee.
The special FCNR(B) deposit window attracted $127 billion, far exceeding the $26 billion raised in 2013.
The inflows helped the rupee close at a 10-week high of around 94.48 per US dollar on September 3.
Economists estimate India’s foreign-exchange reserves could exceed $750 billion, strengthening the RBI’s ability to support the rupee.
The deposits have added to abundant banking liquidity, prompting suggestions including longer-term VRRR auctions, OMO sales and possibly a CRR increase.
Because the deposits mature in three to five years, future dollar withdrawals could renew pressure on the rupee.
- Who
- The Reserve Bank of India, Indian banks, economists and non-resident depositors are involved.
- What
- A special FCNR(B) deposit window attracted $127 billion and created both stronger foreign-exchange reserves and a large domestic liquidity-management challenge.
- Where
- India’s banking and foreign-exchange markets.
- When
- The window closed at the end of August; the rupee’s 10-week-high closing rate was recorded on September 3, and the deposits mature in three to five years.
- Why
- The deposits were raised to attract foreign currency, support reserves and help manage pressure on the rupee, but they also increased banking-system liquidity.
More aggressive liquidity absorption
Cautious, targeted management
How to handle the surplus
More aggressive liquidity absorption
Economists including Rajani Sinha support using a mix of longer-tenor VRRR operations and OMO sales, with a CRR increase if the surplus persists.
Cautious, targeted management
The article notes that banks have shown stronger preference for one- to three-day placements, so longer auctions may see limited uptake; organic outflows and other factors could also absorb liquidity.
Whether to raise CRR
More aggressive liquidity absorption
A CRR increase would require banks to keep more deposits as cash with the RBI and could help drain persistent excess liquidity.
Cautious, targeted management
Rajani Sinha cautions that raising CRR could offset the benefit of exempting FCNR(B) deposits from CRR and statutory liquidity ratio requirements.
Future currency risk
More aggressive liquidity absorption
Large withdrawals when the deposits mature could increase dollar demand and put renewed pressure on the rupee.
Cautious, targeted management
Radhika Rao says earmarking part of existing foreign-exchange reserves against these liabilities could help mitigate that risk.
Key facts
- FCNR(B) inflows
- $127 billion was raised through the special window.
- Comparable 2013 window
- A similar window raised $26 billion.
- Rupee on September 3
- The rupee closed at around 94.48 per US dollar, a 10-week high.
- Earlier rupee low
- The rupee reached a record low of 96.96 per US dollar in May.
- Estimated reserves
- Economists expect overall foreign-exchange reserves to exceed $750 billion.
- Deposit maturity
- The FCNR(B) deposits mature in three to five years.
- Liquidity tools discussed
- Possible measures include longer-tenor VRRR operations, OMO sales and a possible CRR increase.
Quotes
Sneha Pandey
Fund manager—equity at Quantum AMC
“Given the swap arrangement, these inflows will add to an already abundant rupee liquidity backdrop, which was at a four year high this month, depressing overnight rates.”
businesstoday.in
“The RBI may initially deploy a mix of liquidity management tools, including longer-tenor VRRR operations and OMO sales, to absorb the emerging surplus liquidity.”
businesstoday.in
Sources
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