RBI’s Early Closure Of FCNR(B) Swap Window Raises Rupee Risks; SBI Research Sees Scope For Intervention

The Reserve Bank of India (RBI) recently closed its FCNR(B) swap window ahead of schedule, prompting concerns about the rupee's exchange rate and the impact of global market volatility. According to SBI Research's latest Ecowrap report, banks could potentially mobilize $65-70 billion through FCNR(B) deposits. Including external commercial borrowings (ECBs), this figure could rise to $80-85 billion.

The cost of hedging these deposits is estimated to be around 3% annually, with a total cumulative cost over five years of approximately $10.5 billion on a $70-billion deposit base. This represents a relatively small burden on India's foreign exchange reserves, estimated at nearly $700 billion, and could potentially amount to just 1.27% of the reserves in five years.

Despite these measures, the report suggests that the rupee's strength has been limited, appreciating only 0.1% since the swap program began. SBI Research anticipates further appreciation towards 95-95.5 per US dollar by the end of August, should the pattern observed in the 2013 FCNR(B) scheme hold true. The brokerage advises the RBI to consider more proactive, unexpected intervention in the foreign exchange market to alter the prevailing perception of a predominantly depreciating rupee.

Factors such as the 30-year US Treasury yield nearing a five-year high and potential Japanese intervention in the yen market could also pose pressure on the Indian currency.