RBI Monetary Policy: Why RBI is unfazed by foreign deposit redemptions

Moneycontrol BureauEven as outgoing RBI Governor Raghuram Rajan kept the key policy rate unchanged in his last policy meet, the limelight fell on liquidity in the system. The foreign currency non-resident (or FCNR) deposits raised by domestic banks in 2013 will soon be coming up for redemption in September-November. It could see outflows of about USD 20 billion from banks. Three years ago when the rupee was under strain, local banks raised USD 25 billion via FCNR deposits and another USD 9 billion through foreign currency borrowings and swapped the same with the banking regulator. Out of this USD 25 billion pie, most of which was linked to borrowed funds will become due beginning this September.However, the RBI is prepared, says Rajan. "We do not see the FCNR(B) repayments as disruptive," read an RBI statement. And one trick the banking regulator has up its sleeve to counter these redemptions is to take advance deliveries of forward positions in the run-up to delivery positions. (Forward contract is a hedging technique used in contracts where two parties settle on a price of a commodity at the time of delivery to cover for losses.)The RBI will also continue to inject money into the system through foreign exchange interventions and spot interventions."The RBI has been frontloading liquidity provision through open market operations and spot interventions/deliveries of forward purchases. The Reserve Bank will continue with both domestic liquidity operations and foreign exchange interventions that should also enable management of the FCNR (B) redemptions without market disruptions," the statement said.The RBI has decided to hold an open market purchase auction (one of the measures in which he RBI pumps money) in two days, thereby front-loading provision of liquidity.However, a few niggling worries do remain. Banks, which have hitherto not passed on the full benefit of the 150 bps rate cut since January 2015, with FCNR redemptions around the corner, they would be even less willing to do so."Earlier, some bankers said that it was the lack of liquidity that was holding rates high, now I hear from some that it is fear of the FCNR(B) redemptions that is making them reluctant to cut rates," he added.