$10 billion unhedged gap in foreign exchange deposit redemptions may put rupee under pressure – the economic times

KOLKATA | MUMBAI: The Indian banking system has left a $10-billion position unhedged amid foreign exchange deposit redemptions, making the rupee vulnerable to a sudden depreciation in the next few months.

On the other hand, such a drop would act as a booster for exports and possibly narrow the trade deficit although imports of oil and other commodities would become costlier, said experts, some of whom suggested the gap may have deliberately been left uncovered.

Three years after the Reserve Bank of India sought to shore up the rupee through foreign currency non resident-bank (FCNR-B) deposits, the country is bracing for an outflow as these get redeemed. Internal slave trade definition The rupee was at 66.72 a dollar on Friday.

According to a note prepared by one of India’s top private sector banks, there’s a $9.5-billion gap between $22.4 billion of FCNR-B maturities and $12.9 billion of forward contracts for October and November.

“There is high possibility of a systemic rupee depreciation in the coming months on account of FCNR-B outflows,” said KN Dey, executive director at Mecklai Financial.

International trade economics definition “The rupee has been steady for almost 10 months and a fall will boost exports and in turn, reduce trade deficit.”

A fall in the rupee should make Indian goods more competitive in the global market. Definition of trade finance in banking Indian exports revived in September to grow 4.62 per cent on year to $22.8 billion with 18 of 30 exporting sectors showing growth.

This was the second instance of growth this year after June when exports rose 1.27 per cent after declining 18 months in a row. Trade policy definition With a 2.5 per cent fall in imports to $31.2 billion, the trade deficit stood at $8.33 billion in September.

The hedging shortfall will generate dollar demand in excess of what flows in regularly via overseas investments and non-resident deposits, said a senior bank executive.

Citing RBI data for August end, the bank report cited above said forward long contracts for September were worth $2.9 billion against $2.1 billion in FCNR-B repayments, but those in October-November are at $12.9 billion against $22.4 billion of maturing deposits.

“It is unclear why RBI has not matched maturities in October and November, but (it’s) possible that deliveries will be taken at maturity of deposits,” the report said.

“However, if this is not done, reserves could be temporarily lower in the months, necessitating larger OMO (open market operation) purchases.”

The bank said the report was confidential and meant for private circulation to corporate clients with foreign currency exposure. Definition of a trade deficit Given the fact that RBI has meticulously prepared for the redemption and took delivery of forward positions as redemption neared, leading to a steady rise in reserves, the gap in forward contracts has left many market participants puzzled.

Some experts argued the gap may have been deliberate and a means of systematically depreciating the local currency to boost exports. Definition of retail trade Last month, a rumour about rupee devaluation to boost exports had sent the rupee into a spiral, forcing the government to issue a denial.

Banks mobilised $34 billion from overseas depositors between September and November 2013 through a special RBI scheme amid the currency crisis. Define trade protectionism Out of this, $26 billion came in through the FCNR-B window and banks then swapped those dollars with the central bank.

RBI, in turn, bought forward contracts from other banks and regularly rolled over the positions. Trade accounts definition Experts believe that some banks which dealt with RBI in the third leg of the scheme might have kept their positions uncovered but these could not have possibly added up to this massive $9.5-billion gap.

“FCNR-B outflows have already started happening in the currency market. Definition of travel trade There could be bank specific imbalances to manage it,” said Ashish Vaidya, head of trading and asset liability management at DBS Bank.

“Amid tepid global growth outlook, emerging markets like India may lose investment sheen especially when US Fed is expected to hike rates. Merchandise trade balance definition All these factors collectively can put the rupee under pressure.”

The flow of non-resident Indian (NRI) deposits, a sure source of dollar funding for the Indian economy, has also slowed down. Trade publication definition It fell 55 per cent to $3.8 billion in the April-to-August period, making RBI’s forex management a tad more difficult.

RBI has, however, maintained that India has enough reserves to fight volatility in the forex market. Global trade agreements definition Forex experts believe RBI has already started digging into reserves to ease pressure on the rupee. Fair trade products definition These amount to $367.7 billion and can cover 11 months of exports.

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