RBI launches credible NRI
deposit scheme… at last
Bottom line: FX reserves – not rates - key to INR stability
We welcome Governor Raghuram Rajan's proposal to offer a swap at a
concessional 3.5% to banks for FCNRB deposits of 3+ years on his very first day.
This should add about US$10bn to FX reserves and rein in INR expectations
around current levels (Table 1). This brings to fruition our standing call that the
RBI would need to mobilize FX reserves by launching a NRI deposit scheme in
which the INR risk is borne by it (or the government). This begs the question, can
the Governor roll back the July 15 tightening in his first policy on September 20?
Not unless the Fed defers tapering - as is indeed our house call - or the markets
decide that tapering is priced in. We would otherwise expect the RBI to unwind
the July 15 tightening only in end-October or December after sufficient visibility
that today’s measures are working. Do read our last Rupee Dilemma report here.
FCNRB deposits, with RBI swap, to mobilize US$10bn
The RBI will swap FX-denominated FCNRB deposits, of 3+ years, at a fixed
hedge cost of 3.5 % a year till November 30. This should fetch US$8-10bn with
the incidence of INR risk shifting away from the NRI and the bank at a time of
extreme volatility. Banks are raising these deposits from NRIs at Libor/swap rate +
400bp. In sum, the cost of FCNRB deposit mobilization works out to about 8.5%.
If banks lend at, say, 11%, they will likely make the entire 250bp spread as
FCNRB deposits will not attract CRR or SLR for now. Do read our last FCNRB
report here.
The RBI has also raised banks’ current overseas borrowing limit of 50% of the
unimpaired Tier I capital to 100%. This can also be swapped with RBI at a
concessional rate of 100bp below the ongoing swap rate prevailing in the market.
Exporters will be permitted to re-book cancelled forward exchange contracts to
the extent of 50%, up from 25% earlier, of the value of cancelled contracts. This
facility will be introduced for importers up to 25%.
Finally, eligible borrowers will be allowed to avail of external commercial
borrowings under the approval route from their foreign equity holder company with
minimum average maturity of 7 years for general corporate purposes.
RIBs, IMDs stabilized INR
We expect the FCNRB deposit-cum-swap facility to stabilize INR expectations in
absence of a major FX shock. After all, similar schemes, like the 1998 Resurgent
India Bonds and the 2001 India Millennium Deposits – each of which raised
US$5bn - had been extremely effective in this regard (Charts 1 and 2). In fact, we
have been urging a similar step for the past 18 months.
Monetary policy, NPAs, bank licenses, inflation hedges
Monetary policy framework. Deputy Governor Urjit Patel will head a task force
to strengthen the monetary policy framework.
��
deposit scheme… at last
Bottom line: FX reserves – not rates - key to INR stability
We welcome Governor Raghuram Rajan's proposal to offer a swap at a
concessional 3.5% to banks for FCNRB deposits of 3+ years on his very first day.
This should add about US$10bn to FX reserves and rein in INR expectations
around current levels (Table 1). This brings to fruition our standing call that the
RBI would need to mobilize FX reserves by launching a NRI deposit scheme in
which the INR risk is borne by it (or the government). This begs the question, can
the Governor roll back the July 15 tightening in his first policy on September 20?
Not unless the Fed defers tapering - as is indeed our house call - or the markets
decide that tapering is priced in. We would otherwise expect the RBI to unwind
the July 15 tightening only in end-October or December after sufficient visibility
that today’s measures are working. Do read our last Rupee Dilemma report here.
FCNRB deposits, with RBI swap, to mobilize US$10bn
The RBI will swap FX-denominated FCNRB deposits, of 3+ years, at a fixed
hedge cost of 3.5 % a year till November 30. This should fetch US$8-10bn with
the incidence of INR risk shifting away from the NRI and the bank at a time of
extreme volatility. Banks are raising these deposits from NRIs at Libor/swap rate +
400bp. In sum, the cost of FCNRB deposit mobilization works out to about 8.5%.
If banks lend at, say, 11%, they will likely make the entire 250bp spread as
FCNRB deposits will not attract CRR or SLR for now. Do read our last FCNRB
report here.
The RBI has also raised banks’ current overseas borrowing limit of 50% of the
unimpaired Tier I capital to 100%. This can also be swapped with RBI at a
concessional rate of 100bp below the ongoing swap rate prevailing in the market.
Exporters will be permitted to re-book cancelled forward exchange contracts to
the extent of 50%, up from 25% earlier, of the value of cancelled contracts. This
facility will be introduced for importers up to 25%.
Finally, eligible borrowers will be allowed to avail of external commercial
borrowings under the approval route from their foreign equity holder company with
minimum average maturity of 7 years for general corporate purposes.
RIBs, IMDs stabilized INR
We expect the FCNRB deposit-cum-swap facility to stabilize INR expectations in
absence of a major FX shock. After all, similar schemes, like the 1998 Resurgent
India Bonds and the 2001 India Millennium Deposits – each of which raised
US$5bn - had been extremely effective in this regard (Charts 1 and 2). In fact, we
have been urging a similar step for the past 18 months.
Monetary policy, NPAs, bank licenses, inflation hedges
Monetary policy framework. Deputy Governor Urjit Patel will head a task force
to strengthen the monetary policy framework.
processes in face of rising NPAs.
Bank licensing. Ex-governor Jalan will head a panel to recommend bank
licenses to be issued by January 2014. Banks will now be free to set up branches.
Inflation indexes saving certifications: The RBI and the government are
planning to issue inflation indexed saving certificates to shield the common man
from inflation.
Key watch: BRICS fund, US non-farm pay rolls
1. BRICS fund. There is some expectation that the G-20 will announce a BRICS
FX fund to intervene in offshore markets on Thursday or Friday.
2. 165k August non farm payrolls: Our US economist, Ethan Harris, sees
August non-farm payrolls expanding by below consensus 165k (175k consensus)
on Friday. The INR will see a relief rally if the Fed does not taper on September
17-18 or the market decides that tapering is priced in. Ethan still expects the Fed
to begin tapering only in December although he acknowledges September will be
a close call. D
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