Regarding the Reserve Bank of India's (RBI) decision to close the window for fresh FCNR(B) deposits under the special swap facility on August 31, one month ahead of the scheduled date (September 30), SBI Research in its report 'Ecowrap' has said that FCNR (B) swaps cost is unlikely to have been a constraining factor for RBI’s decision to close the window ahead of schedule. Instead, it pointed that most likely reason could be that the target for FCNR(B) mobilisation has already been achieved. It added that FCNR(B) deposits stood at $52.3 billion as of August 13, while total mobilisation under the facility, including overseas foreign currency borrowings and external commercial borrowings, stood at $56.8 billion. Further, it expects FCNR(B) mobilisation of $60-65 billion and total inflows, including OFCBs and ECBs, of $80-85 billion.
Clarifying that swaps cost unlikely to be a key reason for early closure of the facility, SBI research noted that the potential FCNR(B) mobilisation of $65-70 billion, combined with an average USD/INR hedging cost of around 3% per annum, implies an annual notional hedging cost of about $2.1 billion on a $70 billion corpus. Therefore, the cumulative hedging cost could amount to around $10.5 billion over five years. With current reserves at around $700 billion and incremental reserve accumulation assumed at roughly $20 billion annually, the five-year cumulative hedging cost of $10.5 billion would amount to only 1.45% of the current reserve stock and around 1.27% of the projected reserve stock. It added that the cost is unlikely to represent a significant trade-off against the broader objective of strengthening India's external liquidity and reserve position.
Despite the sizeable inflows, the rupee has barely responded to the FCNR(B) measures. SBI Research said that the rupee's appreciation has been only around 0.1% from the opening levels when the FCNR(B) scheme started as compared with 2013, when the rupee appreciated 4.9% between August 31 and November 30 and 8.8% by March 2014 following the FCNR(B) swap window.
