New dollar window a big boost for banks

Newly-appointed RBI governor Raghuram Rajan's first decision was a special window to mobilise dollar flows from non-resident Indians and allow banks to raise more capital overseas. This has delighted bankers and the stock markets, reports CNBC-TV18's Gopika Gopakumar.

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Raghuram Rajan took over as RBI governor on Wednesday afternoon. And by evening, he'd jumped into action, which brought confidence back to the markets.

One of the first measures he announced was the setting up of a window facility to liberalise capital inflows.

Under this window, banks can swap the dollar deposits raised from non-resident Indians with rupee deposits. And for this hedge, banks will have to pay RBI an interest at just 3.5 percent per annum, against current hedging costs of 7 percent. This will bring the total cost of FCNR deposits down to around 9 percent.

Bankers welcomed this move. Shyam Srinivasan, MD & CEO of Federal Bank, said: "FCNR deposits relative to the rupee was less attractive for NRI depositors, particularly the mid-tier segment. But more recently, after the last liberalisation, we have taken it up from Libor plus 300 to Libor plus 400. And now it gets more attractive for the banks because our swap cost is sharply lower."

Rajan didn't stop there. He also hiked the overseas borrowing limit of banks to 100 percent of tier-1 capital, against the current 50 percent limit.

Banks can then swap these funds with RBI at a cheaper rate - 100 basis points below the normal swap rate that stands at 7 percent. Now this is a big bonus for banks which do not have branches abroad, and hence find it tough to raise funds there for domestic purposes. But some bankers say this move will become beneficial only when the economy picks up.

VR Iyer, CMD, Bank of India, said: "Immediately, I don't think I should be doing that because there is no need for me to do that immediately. When the opportune time comes and the economy picks up definitely that is a good option for me to do that."

But the bottom line is that both these measures have cheered up the markets to no end.

Bank Nifty jumped over 9 percent in appreciation, with Yes Bank and Axis Bank leading the charge. A back-of-the-envelope calculation has analysts saying these measures could bring in as much as USD 10 billion over the next 3 months. And that is good news for the rupee, which jumped over 1 percent higher in the first hour of trade in anticipation.