India has drawn more than $50 billion from its overseas citizens since June, prompting the central bank to close a special window for attracting foreign-currency deposits a month ahead of schedule.
Banks received $52.3 billion through foreign currency non-resident, or FCNR (B), deposits, as of Aug. 13, according to data released by the Reserve Bank of India on Friday. Together with inflows through overseas foreign currency loans and external commercial borrowings, that takes the total to $56.85 billion. The facility was scheduled to close on Sept. 30.
The RBI said that based on the “encouraging response to the swap facility for FCNR(B) deposits and the resultant forex inflows,” it was decided the measure would be available until Aug. 31.
The early deadline indicates that the response to the plan has exceeded the RBI’s estimate, according to Gaura Sen Gupta, chief economist at IDFC FIRST Bank Ltd. Total inflows under the program are still expected to be robust at $70 billion, she said.
The RBI said in June it would bear the currency-hedging costs for lenders raising deposits from Indians living overseas and also allow borrowing against such funds. Banks are vying for those dollars, offering interest rates of as much as 7.75% on five-year deposits to attract capital from the country’s 35 million-strong diaspora.
The inflows provide an additional buffer for the central bank as elevated crude oil prices put pressure on the rupee. The RBI has been intervening in the foreign exchange market over the past week, keeping the dollar-rupee pair in a tight band.
Surprise Move
Having ruled out an early closing of the window just a few days back, the RBI suprised traders with its move. As a result, India’s bond market might see a selloff, especially at the shorter end, when trading resumes on Monday. That end of the curve has been a huge beneficiary of increased local liquidity as banks swap dollars for rupees under the RBI’s special window.
“Excess cash was being parked in bonds, especially the short end,” said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank. “With the RBI also taking out the surplus liquidity through reverse repos, the premature close of the deposit plan makes the view on liquidity less favorable.”
Pawar added that the 10-year bond yield could advance 2 to 3 basis points on Monday while those on the 5-year could see a sharper rise of 5 to 7 basis points.
Since June, when the RBI’s measures were announced, the yield on 5-year notes has dropped around 47 basis points, outpacing a fall of 25 points in 10-year bond yields.
The early closing of the swap window is unlikely to have much of an impact on the rupee, as the program has raised hefty overseas flows. In addition, sentiment around the currency is being dictated by swings in oil prices.
“The exchange rate was anyway more susceptible to geopolitical developments and crude oil prices; as such any impact on the rupee on Monday would likely be transient,” said Dhiraj Nim, FX strategist at Australia and New Zealand Banking Group.
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