FCNR redemptions: Rupee keenly watched as forex reserves drop highest since 2013

Reserve Bank of India (RBI) on Friday said that India's foreign exchange reserves dropped by $4.35 billion, at $367.64 billion. 

The impact is likely to be seen on Indian Rupee as Hariprasad MP, Senior Vice President and Head Treasury at Centrum Limited said, “The FCNR redemption outflow will have a short term impact on the Rupee, more so sentimentally.”

“The news that only a part of the redemptions are hedged has already impacted the Rupee negatively. The USD/INR pair will be relatively volatile during this period,” said Hariprasad.

In 2016, from January till date, Rupee has declined nearly 2% against dollar. 

Since the start of year 2016, forex reserves had touched a new high week after week as RBI built up its reserves to prepare against externalities. Foreign Currency Asset - which indicates the largest element of country’s reserve, have also declined this month.  

During the month of September, 2013 Reserve Bank of India (RBI) had launched a three-year concessional USDINR swap windows to mobilise FCNR (B) related flows. Total amount of $26 billion of swaps were mobilised by the banks and these flows are scheduled to expire between September-December 2016.

It is time for these foreign currency non-resident (FCNR) deposits to mature and hence the drop in dollar reserves. 

ICICI Bank, during the second bi-monthly monetary policy of RBI, had said,"As RBI takes delivery of the forwards, FX reserves are likely to rise in the short term but will reduce as RBI pays USD 24 bn against FCNR (B) swaps maturity."

Lastly Hariprasad added, "RBI along with Government of India announcements that  volatility will be managed with minimum disruption will be keenly watched with events unfolding in the US with regard to the Presidential elections as well as the imminent possibility of a rate hike by the US Fed."