by Moiz Mannan
The rupee defence move of liberalising bank deposit rates for non-resident Indians by the Reserve Bank of India (RBI) is expected to come to fruition with the apex bank now offering banks a concessional window to swap dollar funds.
It is nearly a month now that in its attempts to shore up the plummeting rupee, the RBI had liberalised the interest rate on FCNR deposits (for three- to five-year maturity) to LIBOR/swap plus 400 basis points (bps) from LIBOR/swap + 300bps. Under the FCNR scheme, non-resident Indians (NRIs) are allowed to hold deposits in foreign currency, thus avoiding exchange rate risks.
For NRIs, this was a huge opportunity to make the most of their money earned abroad. However, the expected hike in deposit rates by banks did not happen. A weakening rupee increases the hedging cost on such deposits, discouraging banks from promoting them on a big scale.
In the present situation, banks are not going all out to raise non-resident deposits because to use them locally, they have to swap them into rupees. A swap enables a bank to get back the same quantity of dollars to repay when the deposit matures even if the rupee has depreciated since then. Typically forex swaps cost around seven percent, which increases the cost of a dollar deposit equivalent to 12.73 percent.
According to RBI, banks had requested it to consider a special concessional window for swapping FCNR deposits that will be mobilised after interest rate liberalisation. Following up on this, the apex bank on Wednesday announced that it will open a swap window to attract foreign currency non-resident (FCNR (B)) dollar funds. RBI has also allowed banks to borrow overseas an additional 50 percent of their net worth and swap that with RBI at 100bps lower than the ongoing swap rate prevailing in the market.
The swap window for fresh dollar deposits mobilised from NRIs, which will be available to banks up to November 30, 2013. The central bank will offer the swap for dollar funds mobilised for three years and above at a fixed rate of 3.5 percent per annum at a concessional rate of 100 basis points below the market rate.
The move will encourage the banks to raise such deposits as their cost of funds will decrease by at least 2.5 percent. In addition, recently RBI has provided a dispensation to banks that they will not have to maintain cash reserve ratio and statutory liquidity ratio for incremental FCNR (B) deposits. The swap facility is available to the banks till November 30.
The RBI measure is aimed at providing forex cover to banks at a reasonable cost so that they can collect dollar deposits in normal course and convert them into rupees using this forex cover.
Experts say that the RBI move, announced by new Governor Raghuram Rajan, for boosting foreign fund inflows is likely to fetch around $10bn.
Following the announcement, the rupee, which had touched an all-time intra-day low of 68.85 to a dollar on August 28, immediately strengthened by hefty 138 paise to trade at 65.69 against the dollar at the Interbank Foreign Exchange market.
Similarly, the RBI also eased foreign direct investment (FDI) norms and allowed banks to provide guarantees on behalf of NRIs to acquire shares and debentures in Indian companies.
In a notification on Thursday, RBI said “In order to provide operational flexibility and ease the procedures, it has been decided to permit banks to issue bank guarantee, without prior approval of the Reserve Bank, on behalf of a non-resident acquiring shares or convertible debentures of an Indian company through open offers/delisting/exit offers.”
Earlier in the week, the apex bank simplified rules governing investments by NRIs’ portfolio investments like equities and debt. Under the porfolio investment schemes (PIS) for NRIs, banks were given unique code for each branches, making it cumbersome for them to administer the scheme.
RBI has now dispensed with the unique code for branches and said banks shall be “free to permit its branches to administer the PIS scheme for NRI.
The designated branch of the bank will grant one time permission to the NRI applicant for purchase and sale of shares or convertible debentures of an Indian company, RBI said in a notification.