FCNR (B) redemption of $20 b unlikely to pose a challenge: Nomura India MD

The RBI may have paused on rates, but the big question remains whether India will be able to smooth out the $20-billion outflow when FCNR (B) deposits raised in 2013 are redeemed in September. Governor Raghuram Rajan sought to assuage concerns on dollar and rupee liquidity. He asserted that the RBI has plenty of dollars that can be supplied to stem a possible volatility in the foreign exchange market arising from dollar outflows due to maturing FCNR (B) deposits. Speaking to Bloomberg TV India , Nomura India’s Managing Director and Head of Fixed Income Neeraj Gambhir says he does not see any reduction in the rates, here onwards, as the CPI inflation continues to be on the 5-5.5-per cent band. CPI inflation has to drop to around 4 per cent for the RBI to think of cutting rates, he said.

The focus of June policy was not so much on the repo rate but on the liquidity neutrality, especially in the light of the FCNR (B) deposit maturity and its possible impact on currency and bond markets. What is your key take-away from the policy?

The policy is largely on the expected lines. We are into a consolidation phase, as far as the commodity prices, and more importantly, the crude oil prices are concerned. It basically means that the disinflation process that we have been seeing, has probably taken a bit of a halt. Our own house view is that we do not see any reduction in the rates here onwards as the CPI inflation continues to be on the 5-5.5-per cent band. And we will have to see a sustained drop towards 4 per cent before we can think of any further reduction of rates by the RBI.

As far as the liquidity neutrality is concerned, it is currently in a very decent shape as the government has spent a lot of its cash balance and the system is reasonably positioned. The RBI, in fact, is conducting the reverse repo auctions at this point of time to take out liquidity from the system. But this position will change as the government builds up cash balances towards the second half of the year. So we will have to see how that plays out. But the belief at this point is that, after having about ₹70,000 crore worth of open-market operations, the RBI is pretty proactive in terms of providing liquidity in the system. And, therefore, it may not have returned to the neutral level as it is required right now. It will take some more time. But at least from a directional stand point and from the RBI action stand point, we are seeing that the path is set.

On FCNR (B), I think it is a little bit of an unprecedented event in the sense that we have not seen the size of the maturities going through the system. There are multiple banks involved and each bank has its own balance-sheet structure and strategy. So it is little bit difficult to predict what will happen at that point of time. But to the extent that the Reserve Bank is willing to provide the liquidity to the market, both in terms of INR (rupee) as well as in dollars, I do not foresee it as a large issue. But we will have to take a closer assessment as we reach closer to the time of maturity of the FCNR (B) deposits.

Given that Rajan has also highlighted certain counter party risks, as some entities owe dollars to the RBI, do you think the component of the systemic risk in the run-up to maturity is likely to increase?

I don’t think so. The issue here is that the banks have entered into a forward dollar transaction with the RBI. Come that particular point of time of maturity, the banks will have to make sure that the hedges they have put in place or the counter transactions they have done in the market, those dollars are available to them at that point of time. If there are short-term mismatches, I am sure the RBI will step in to provide that liquidity.

But eventually, every bank will have to work on its own strategies as to how they are going to make sure the availability of the dollars required to be given to the RBI during maturity — how do they organise it, how do they manage their balance sheet around it, and what is their dollar liability funding strategies going into this event. It’s hard to predict what will happen. But as these are large banks with large balance sheets, both on INR and dollar side, I personally don’t foresee a big problem.