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    RBI may have to go back to diaspora if stress on rupee persists

    Synopsis

    A stronger dollar (buoyed by the possibility of an early Fed rate hike) could add to the pressure on the rupee and force RBI to sell a slice of it.

    ET Bureau
    By Gayatri Nayak

    The rupee has touched almost three-month low, but there is no buzz about dollar selling by the Reserve Bank of India to rein in the value of the local currency. The rupee closed at 67.75 on Tuesday, near the levels of September 2013 that had made the central bank come out with a special scheme for banks to attract NRI funds with higher returns on foreign currency (or, FCNR) deposits.

    Around $25 billion flowed into the scheme, pushing up the rupee 9% in a month. Now, that money has to be repaid. And in the run up to the maturity of these deposits, the rupee is gradually giving up the gains, raising the question how the $25-billion redemption would be handled.

    Governor Raghuram Rajan has ruled out a rollover of the FCNR deposits that will mature in September – the month his term also ends. In a post-policy media meet, Rajan said the central bank is comfortable that there is no asset-liability mismatch due to these flows. This means the money raised through these deposits has been deployed by banks to match the tenor of the deposits with those of investments and loans. In other words, dollars lent would come back to banks to repay the NRI depositors. But that’s only a part of the story.

    The country’s external sector balance sheet has many more components. Besides portfolio flows that influence the level of forex reserves, there is foreign direct investment, or FDI, and overseas borrowings that add to the dollar supply. The trade (merchandise and services) and transfers by individuals (remittances), along with the investment income, among others, shape the current account balance. At the macro level, there are visible signs of pressure on the rupee and foreign exchange reserves.

    Despite a record FDI of $55 billion and a narrowing of trade deficit, the RBI managed to mop up only $10.2 billion from the currency market in FY16. The reserves, which also include non-dollar currencies and their revaluation impact against the dollar, have gone up by $18 billion. Perhaps, FDI inflows compensated for the pullout by FPIs (foreign portfolio investors) during the year.

    But there are concerns other sources could turn out to be less reliable. Remittances by overseas Indians, which constitute a good part of current account inflow, are falling. On the other hand, outward remittances under the liberalised remittances scheme, which allows a resident Indian to buy stocks, properties and spend money on education as well as on relatives staying abroad, surged more than three time in FY16. Even foreign investors have taken back higher amounts this year as income from their investments.

    Even though the import cover of reserves — the number of months’ imports that foreign exchange reserves can fund — is at a comfortable level of 15 months, it may not be much of a cushion. Rising crude and other commodity prices could add pressure to dollar demand.

    Also, a stronger dollar (buoyed by the possibility of an early Fed rate hike) could add to the pressure on the rupee and force RBI to sell a slice of it. The combination of factors could even force the monetary authority to rollover the high-cost money borrowed from the diaspora. But this may be its last choice.


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