MUMBAI: The Reserve Bank of India’s decision to advance the closure of its foreign currency non-resident bank or FCNR (B) deposit window has surprised banks and market participants, especially because the governor recently said otherwise.
The abrupt change has raised concerns about policy predictability, with market participants suggesting that even a caveat from the central bank that the scheme could be reviewed depending on the pace of inflows would have helped banks and customers plan better.
The early closure came as a surprise to market participants and banks that had been arranging funding and leverage transactions based on the original timeline, three senior treasury officials said on condition of anonymity.
“It has created chaos in the market because customers are extremely unhappy,” a senior treasury official at a large private bank said. “People were preparing their cash flows. They had 45 days to prepare their cash flow and all that has gone haywire.”
Whatever the reason for the closure, the market was taken aback. It’s not just about leverage, the senior banker said.
“It’s also about the fact that people were enjoying the 6% rate on those deposits, but they can’t do anything now. How do you suddenly generate cash? And these are decent-sized cash flows,” the senior banker said.
RBI governor Sanjay Malhotra said 5 August there were no plans to pre-close or extend the scheme. Nine days later, the central bank said that the facility, originally scheduled to remain open until 30 September, would instead accept FCNR (B) deposits only until 31 August.
The decision came after banks mobilized $52.3 billion through FCNR (B) deposits until 13 August, accounting for 92% of the total $56.85 billion raised through the special deposit window, including overseas foreign-currency borrowings (OFCBs) and external commercial borrowings (ECBs).
An email sent to RBI on the matter did not elicit any response till press time.
There may have been valid reasons to justify an early closure – the most likely one being that the mobilization target had already been achieved with inflows at $57 billion and another $25 billion-30 billion could easily flow in during the remaining days of August, taking the total collection to about $85 billion, SBI Research’s Ecowrap report said on 17 August.
“This decision may have been driven by concerns over the amount of liquidity that could ultimately enter the banking system,” a second treasury official said. It may have decided that inflows beyond a point are not needed because of the cost to be borne and the absorption of liquidity, the official added.
Since the scheme was announced on 5 June, the central bank has infused liquidity worth ₹5 trillion in the banking system, market participants estimate. Under the FCNR swap programme, banks are exchanging dollars for rupees with the central bank at a concessional rate. Simultaneously, RBI has been conducting variable rate reverse repo (VRRR) operations to suck out excess liquidity.
Liquidity in the banking system was at a surplus of ₹3.62 trillion as of 17 August against ₹3.98 trillion on 14 August and ₹1.85 trillion on 5 June, when the scheme was announced.
According to the second official, banks had previously told the RBI that the inflows could be managed organically through the banking system, but a much larger inflow could force the central bank to resort to additional liquidity-management measures such as a cash reserve ratio hike and open market operation sales.
The communication gap, however, could have consequences beyond sentiment. Banks that had been preparing to raise funds overseas and provide leverage to NRIs now have barely two weeks to complete transactions.