Foreign currency deposits: Redeposits more attractive to banks despite RBI measures

The desired outcome of the central bank’s latest move to mobilize Indian diaspora foreign currency deposits to halt the rupee’s slide must await further increases in policy rates in the country, with the current arithmetic clearly tipping the scales in favor of national savers that local banks will find. more attractive to operate.

On Wednesday, the Reserve Bank of India (RBI) announced a series of measures to stop the fall of the rupee which nearly fell to the 80 mark for the dollar, an all-time low for the unit. Among the measures announced were the removal of interest rate caps on FCNR (B) (non-resident foreign exchange bank) and NRE deposits and the exemption for banks of additional deposits collected through these channels in their reserve ratio of non-interest bearing cash (CRR). calculations. These rules will remain in effect until October 31.

Bankers said the measures are preventive, but may not immediately spur lenders to attract more dollar deposits.

“The after-hedge cost of FCNR(B) deposits is 1-1.5 percentage points higher than the prevailing rupee deposit rate, making it unattractive to banks,” said Ashish Vaidya, Managing Director, treasury, DBS Bank India.

No interest subsidy

“But things could change in a few weeks as rates only go up, which could make these deposits more viable,” he said.

Currently, the cost of term deposits in one-year rupees is around 6%. In contrast, after taking into account overseas benchmark rates, the cost of hedging and the premium charged by banks, FCNR(B) deposits could cost between 7% and 7.5%, suggesting clearly a business case for local savings.

Also, unlike the last time such a program was announced in 2013, this time there is no RBI support for banks in the form of grants to keep costs down. In FY 2014, banks had raised a record $27 billion via the FCNR(B) route after the RBI removed interest rate caps and also offered banks subsidized interest rates. 3.5% interest rate to prevent rupee rout.

Bankers said that although the rupee is currently under pressure, the crisis is not as acute as it was in 2013, with the rupee losing around 6% of its value in 2022. India is not included either more among the worst performing emerging market currencies and its foreign currencies. foreign exchange reserves of $593 billion are more than double what they were in 2013.

The bankers said the RBI could change its measures and provide banks with additional support to make the schemes more attractive.

“This is a step in the right direction and a positive move. Yes, based on current calculations, it may not be possible for banks to increase these deposits, but the RBI still has the option to add more incentives and make it more attractive,” said KK Tarania, treasury manager at

. “It is therefore too early to measure the success (of these measures).”

In a note released on Thursday, Kotak Institutional Equities said the RBI’s moves signal a stronger intention to address the current dollar shortage.

“While we are cautious about the quantum of additional flows, we view these measures as preemptive to limit any pronounced depreciation bias and reduce INR volatility,” Kotak said in the note. “We continue to see USD-INR in the 78.5-80 range in the near term. We note that the fundamentals continue to weigh on INR. However, the RBI will strive to ensure an orderly depreciation.”