 "FCNR-related dollar shortage may push rupee to record lows")
Reserve Bank of India (RBI) Governor Raghuram Rajan has cautioned about dollar shortage in the market around September, when $20 billion of Foreign Currency Non-Resident (Banks) deposits which banks had raised in 2013 come for maturity. This could lead to the rupee touching fresh lows against the dollar.
Even as RBI has contracted for the dollar, Rajan cautioned that some of the counter parties could face difficulty in supplying the dollars, but the central bank was prepared to face any such eventuality.
Rajan, in a post-monetary policy conference, said there were many possibilities, one such being exporters not having enough dollars to supply to banks for them to honour their obligations. But, economists and currency analysts say it is not just a theory but a real possibility. India’s exports have fallen steadily in the past two years and the situation is unlikely to improve substantially in the coming months.
“If the export situation continues like this, then there will be dollar shortage and it will not only have an impact on the rupee, but on equity markets as well. The rupee touching record lows is not impossible,” said Soumya Kanti Ghosh, chief economist at State Bank of India.
The rupee touched its record lows of 68.87 to a dollar on August 28, 2013. The local currency on Wednesday closed at 66.65 to a dollar.
When the dollar is in short supply, the rupee swings at any small flow of dollars in the market. The ensuing volatility in the exchange rate is detrimental to the normal functioning of all financial markets.
However, currency experts do not expect the dollar shortage to continue beyond a few days and as RBI has already forecast, the central bank will ensure adequate rupee and dollar liquidity in the market.
“There could be some short-term frictional dollar liquidity issue but we don’t expect it to last for more than a few days,” said Ananth Narayan, managing director, regional head of financial markets, ASEAN & South Asia, Standard Chartered Bank.
There are ways that banks can manage the liquidity issue, like raising short-term dollar deposits, raising more FCNR (B) deposits, but banks will have to be on their toe during the period, currency dealers said.
With or without the dollar shortage, the rupee will anyway depreciate gradually to cross the record low levels as the dollar's strength and rupee’s relative outperformance against its trading partners would force the local currency to depreciate to retain India’s competitive advantage, said Ananth Narayan.
RBI, meanwhile, has covered its liability through forward purchases. Latest data show that the central bank has a long position of $18 billion and short position of $25 billion to meet its obligations.
However, some counterparties are apprehensive that they will not be able to deliver easily on dollars, and hence there could be some dollar shortage in the market, said Rajan.
“This is something we will monitor. We may supply dollars in case of extreme volatility, but no one should take this for granted. We are, however, committed to supplying short-term rupee liquidity to the extent needed, to support our monetary stance,” Rajan said, adding “as far as our ability to act, there should be no question.”
