MUMBAI: The RBI has warned that the country's forex reserves will see some wild fluctuations in the first half of FY17. It said that initial months will see forex reserves soar, but it will dip again after September. The central bank also said that it is taking specific measures to ensure liquidity when special deposits raised under a foreign currency scheme come up for redemption.
The dollar deposits - amounting to nearly $26 billion - were raised in September 2013 under a special three-year foreign currency non-resident (FCNR-B) scheme to support the rupee. To ensure that there are enough dollars to meet redemption, the RBI has been making purchases in the forward market. But since the delivery date of the dollars are ahead of the redemption of deposits, the RBI's forex reserves will briefly soar from the present level of around $360 billion.
"The forward purchases and the FCNR(B) swaps are not exactly synchronous in terms of maturity bands. Since the forward purchases are largely front-running the FCNR(B) swaps with regard to maturity, the foreign exchange reserves will, in all likelihood, witness significant accretions initially to be followed by depletions of more or less similar magnitude around the time these deposits mature," the RBI said in a circular.
In his policy, Rajan had said that there is no proposal to try and retain the deposit with a new scheme. "If they want to roll it over, they will. Our estimate is that the scheme came with a lot of borrowed money. We are expecting a very low renewal because we are not going to offer the same favourable terms again. The good news is we are fully prepared for whatever exit takes place and we will monitor market conditions. We do not anticipate much volatility," said Rajan.
"The Reserve Bank is actively monitoring the ongoing market developments and is in readiness to contain the associated market volatility, if any, in relation to completion of swap transactions as well as the concomitant changes in rupee liquidity. Further, the bank will take all necessary measures to even out the resultant rupee liquidity gaps through use of appropriate instruments," the RBI said.
The central bank's warning comes at a time when ratings agency Moody's has forecast a dip in remittances by overseas workers in the Gulf region due to a collapse in international crude prices. In a recent research report, DSP Merrill Lynch estimated that half of the $26 billion of 2013 FCNR(B) deposits that come up for maturity in September 2016 onwards will be withdrawn. Others say that in a worst-case scenario, the entire $26 billion could flow out as a large part of these deposits were made from borrowed money.
Source → RBI warns of fluctuations in forex kitty in FY 17