RBI measures a step in right direction but forex inflows still seen limited

A slew of measures announced by the Reserve Bank of India on Wednesday to attract greater foreign exchange flows may help rein in the current account deficit but to a limited extent, given significant global headwinds.

While the further liberalisation of the foreign exchange market has set the stage to attract more capital into India, currency experts however do not see the steps immediately bringing about a reversal in the rupee’s depreciation, given a broad-based global shift to the safety of the US dollar.

“Given the current risk-averse environment and high hedging cost, the impact on USD inflows is likely to be limited,” Standard Chartered Bank’s Head of Economic Research South Asia Anubhuti Sahay said.

The central bank announced five measures pertaining to the liberalisation of foreign exchange flows into India.

These include regulatory relaxations and the opportunity to offer more lucrative rates on Foreign Currency Non-Resident Bank (FCNRB) deposits, permission of increased overseas investment in Indian debt and higher for External Commercial Borrowings (ECB).

The RBI lifted the requirement of Statutory Liquidity Ratio and Cash Reserve Ratio maintenance for incremental FCNRB and non-resident deposits from the reporting fortnight beginning July 30 for deposits mobilised up to November 4.

The central bank further said in case of Non-Resident External (NRE) account deposits, it had temporarily permitted banks to raise fresh deposits that would be exempt from an earlier cap on the interest rate offered. The leeway would be available till October 31.

On foreign portfolio investments in Indian debt, the RBI announced a set of relaxations on the maturity of bonds as well as eligibility of securities for unrestricted investment. Lastly, the RBI expanded the scope for eligible banks’ lending out of overseas foreign currency borrowed funds and increased the limit for firms looking to raise overseas funds through ECBs.

Analysts pointed out that as against the FCNRB scheme offered in 2013 wherein the RBI introduced a special concessional swap window to incentivise banks to raise dollars, this time around the central bank was not taking on the risk itself.

Treasury officials said based on a back-of-the envelope calculation, theoretically the SLR and CRR portion of the cost for FCNR would be about 30-35 basis points and, therefore, that could be the extent of the increase on FCNR rates. This in itself may not be particularly lucrative, dealers said.

“…On FCNR deposits, banks are not too sure how much incremental flows will come,” Abhishek Goenka, founder and CEO, IFA Global, said.

On the ECB front, experts pointed out that in the current environment of aggressive rate hikes by the US Federal Reserve, the availability of funds was an issue, given higher cost of funds. Goenka pointed out that at the current juncture, Indian firms were not borrowing much through ECBs.

“The measures will have an impact, but I think the impact will be more in the medium term. In the immediate term, we have to see how rates behave and how much issuances of short-term debt are actually done,” Barclays Managing Director and Chief Economist Rahul Bajoria said.

Moreover, cost of hedging exposure could also be an impediment, given hardening forward premia in overseas markets.

Regarding the RBI’s decision to permit greater investment in domestic debt, experts pointed out that FPIs may not yet want to enter the Indian market, given that domestic real interest rates were in the negative territory.

“We don’t see much advantage of doing it immediately. I don’t think there is enough incentive for FPIs to park money in short-term funds. If as an investor you can get 5.5-6 per cent in dollar assets by doing a little leverage, would you like to bring it to India?” a senior official at a large private bank said.

Indeed, of the available limits for FPI investment in government bonds, only 28.9 per cent has been taken up, the RBI data showed. The RBI permits FPI investment in up to 6 per cent of outstanding stock of government securities.

“The recent measures announced by the RBI are a step in the right direction to ease US$ supply side issues in the market. However, given the current international scenario it remains to be seen how much liquidity will flow into India in the short term,” HDFC Bank’s Senior Vice President, Treasury Advisory Group, Bhaskar Panda, said.