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The Reserve Bank of India (RBI) has incentivised domestic banks to raise foreign currency non-resident deposits to shore up its depleting foreign currency reserves. Several economists expect about $15 billion coming in through this route. By offering incentives on the hedging costs, the Reserve Bank of India (RBI) has helped bring down the cost of funds for banks to opt for this route, though it has allowed banks to offer higher interest rates on these deposits. However, analysts say it isn't attractive enough.
So, what has the central bank done? For starters, RBI has allowed banks to offer rates which are 400 basis points (bps) higher than Libor. Earlier, RBI had capped this rate at 300 bps higher than Libor. Banks raising such deposits overseas have also been given exemptions on statutory liquidity ratio (SLR), cash reserve ratio (CRR) and priority-sector lending requirements.
Besides, banks that raise such deposits for three years or more can hedge these incremental deposits at a fixed rate of 3.5 per cent a year at a special RBI window. This would halve hedging costs for banks. Additionally, banks can raise deposits up to 100 per cent of their tier-I capital, compared to the earlier 50 per cent cap.
No doubt, India needs every dollar it can garner, but analysts say banks are not dying to do this. While the incentives may bring down cost of funds by 125-200 bps compared to the prevailing domestic rates, banks are unlikely to rush to raise these deposits. Analysts say currently, such deposits are at merely 15 per cent of tier-I capital of banks.
According to Ambit Capital, despite a discount of 100 bps on the swap facility, the cost of such funds is higher than the marginal borrowing costs of banks in the domestic market. Overall, the brokerage does not expect cost of fund of Indian banks to come down significantly due to the recent measures taken by RBI to make foreign currency borrowings and deposits attractive for Indian banks.
Analysts say if $15 billion does come in through this route, the pressure on the currency would ease, but it is highly unlikely as the total outstanding FCNR (B) deposits at the end of FY13 were at $15 billion, so another $15 billion through this route seems highly implausible. If this does happen, then it would be the highest non-resident Indian (NRI) deposits raised by Indian banks in any single year.
Bank of America Merrill Lynch's economist Indranil Sen Gupta says: "Recent events do vindicate our call that the path to rupee stability lies through NRI deposits rather than rate hikes. Yet, we estimate that the recent measures will add a bare $5 billion to forex reserves in FY14 when the import cover has halved to seven months - last seen in 1998!"
