RBI may pump dollars if FCNR redemption results in outflow

Mumbai, June 7 (IANS) To deal with any market disruption from outflows of up to $20 billion by redemption of foreign currency non-resident (FCNR) deposits, the Reserve Bank of India (RBI) will provide dollar and rupee liquidity if needed, RBI Governor Raghuram Rajan said on Tuesday.

“To the extent that people have borrowed to invest in FCNR deposits, that leveraged portion may not be renewed. Therefore, there could be outflows of the order of $20 billion or so,” Rajan said here announcing the Reserve Bank of India’s second monetary policy review of the fiscal, leaving key interest rates unchanged.

“This is something we will monitor. We will supply dollars in case of extreme volatility, but no one should take this for granted. But for sure, we have plenty of dollars that we can supply if necessary,” Rajan said.

With the rupee under pressure when Rajan took charge of the central bank in September 2013, banks raised $25 billion through FCNR deposits and another $9 billion through foreign currency borrowings and swapped the same with the RBI. The FCNR deposits, most of which were linked to borrowed funds, will be due for redemption between September and November.

The RBI governor, however, warned the markets not to be complacent.

“As far as our ability to act, there should be no question. But we don’t want to encourage complacency on the part of people who have sold us dollars, assuming that we will come in if they can’t provide the dollars to us and bail them out. That is not the intent at all,” he said.

Volatility may emerge as some “counterparties” (banks) may not be able to easily deliver on the dollars that they owe to the RBI. The outflows may also lead to some broad dollar shortage in the markets, Rajan added.

Pointing to India’s comfortable foreign exchange reserves now standing at $360 billion, the governor said the RBI can pump dollars into the market to ease any shortage of foreign exchange.

This, however, will lead to a shortage of rupees, to balance which the RBI would also supply short-term rupee liquidity if needed, he added.

Rajan took charge of the RBI in 2013 at a time when the US Federal Reserve had declared its intent to wind down its stimulus programme. Following this, the rupee plunged in value with respect to the US dollar on fears of a spiralling current account deficit.

Through a series of measures, Rajan managed to stabilise the Indian currency that also brought back investors.



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