India might see a shortage of dollars in the coming days

Foreign Currency Non Resident bank accounts (FCNR) might lead to a shortage of American dollars in India in days to come.

Raghuram Rajan, Governor, Reserve Bank of India (RBI) has said that the FCNR may lead to an outflow of $20 billion from India as these accounts are set to mature soon.

Rajan, while presenting the monetary policy on Tuesday, stated that the leveraged portion of over-borrowed money by people in order to invest in FCNR deposits may not be renewed.

He, however, assured that these outflows have been covered in the forward market and an advance deliveries of these forward positions will be carried by the central bank in the lead up to the maturity of these deposits. Simply put, Rajan has made sure that this sudden outflow of $20 billion doesn’t lead to any fluctuation in rupee’s value.

RBI has vowed to provide dollar and rupee liquidity, if needed, to avoid any disruptions in the market.

How did we reach this stage?

During the month of September 2013, RBI launched a 3 Year concessional USDINR swap window to mobilise FCNR (B) related flows.

Total amount of $26 billion of swaps were mobilised by banks and were scheduled to expire on September-December 2016.

When rupee was under pressure during that month, banks raised $25 billion through FCNR deposits and about $9 billion through foreign currency borrowings and swapped the same with RBI.
 

RBI’s response

Between the months of January - December 2014, to sterilise the rupee liquidity impact of forex intervention and to cover obligations on maturity of FCNR (B) swaps, RBI bought forward dollars instead of buying dollars in spot market.

Currently there is a shortage of $ 2.5 billion between RBI's short and long dollar positions in remainder of the year.

RBI may utilise these current market scenario to buy dollars from the market for narrowing this gap.

There is, however, a maturity mismatch between the FCNR (B) swaps as well as RBI’s forward position, which is likely to create frictions in the systemic liquidity scenario. 

This volatility could emerge as some counter parties, like banks, may not be able to make easy deliveries of dollars that they owe to RBI.

Also the outflow can report some dollar shortage in the markets.

According to bankers, these outflows on FCNR deposits will affect the deposit base in the banking system registering tight liquidity conditions.

Rajan assured, “We may supply dollars in case of extreme volatility, but no one should take this for granted. We are, however, committed to supply short-term rupee liquidity to the extent needed, to support our monetary stance.”