Dubai: Indian banks have quietly redeemed most of Foreign Currency Non-Resident-B (FCNR-B) deposits by November end even as they scrambled to handle the after effects of the government’s decision to scrap high value notes of the denomination of Rs500 and Rs1000.
Banks had mobilised close to $26 billion (Dh95.4 billion) of FCNR-B deposits during the currency crisis in early 2015. This was due for redemption this year — in November 2016 and some of it next month. Banks have redeemed over 90 per cent of the money without the exercise creating volatility in the foreign exchange market.
Last month witnessed redemptions of more than $17 billion of the foreign currency non-resident (FCNR) dollar deposits, out of about $27 billion raised three years ago. But, the huge pressure on the currency market largely went unnoticed because of the demonetisation exercise.
“I think the FCNR (B) has gone through without any problem and the credit goes to the central bank for managing it well, both at the foreign exchange level and at the rupee liquidity level. They planned it very well and the redemption has not created any ripple,” said NS Venkatesh, Executive Director, Lakshmi Vilas Bank.
The rupee had seen some volatility and slid to an intraday low of 68.86 last week in the wake of capital outflows. The election of Donald Trump as US President and the US Federal Reserve’s likely move to raise interest rates also added pressure on outflows and the rupee. Foreign investors have pulled out a record $5 billion from India in November. Bankers said a chunk of FCNR money would have remained within the country.
Concessional window
Three years ago, banks had swapped dollars received in these deposits for rupees with the Reserve Bank of India (RBI). At the time of maturity, banks would give the rupees to RBI and receive dollars to pay their depositors. In November, contrary to earlier expectations, banks did not face major hurdles in shaping rupee for dollars.
In 2013, when the currency came under attack, and the current account deficit and fiscal deficit widened, one of the first announcements by Raghuram Rajan on the first day of taking over as RBI Governor was that the central bank would offer a special concessional window for FCNR-B deposits.
To bolster the rupee, the RBI offered to swap these funds for a minimum of three years at a fixed rate of 3.5 per cent, leading to inflows of $34 billion, and helping stabilise the currency. The scheme worked very well and the country had made money. Against the cost of up to Rs200 billion to get the deposits, the country benefited through stabilisation of rupee, which helped reduce imports by up to Rs1.6 trillion per year through the Rs4 devaluation in the value of the rupee.
