FCNR-B inflows could cost RBI around ₹2 lakh crore in hedging costs: Analysts

Success comes at a cost, and the Reserve Bank of India’s special foreign-currency mobilisation package is no exception. Analysts say that while the scheme has attracted $127.23 billion through Foreign Currency Non-Resident (FCNR-B) deposits over the last three months, it could leave the RBI with a hedging cost of around ₹2 lakh crore.FCNR-B deposits are made in foreign currencies with banks in India. Banks typically incur two costs on these deposits. The first is the interest payable on the deposits, usually in US dollars. The second is the cost of converting the foreign currency into rupees for onward lending. It is on this latter cost that the RBI offered banks rates below prevailing market levels.For the RBI, the move was aimed at making the scheme more attractive by offering a concessional dollar-rupee swap window on funds raised through FCNR-B deposits.“Under the scheme, RBI agreed to absorb the currency hedging cost on the principal amount of eligible FCNR(B) deposits, which market participants estimated at around 2.8-3.0% per annum. Accordingly, the gross swap/hedging cost associated with the FCNR(B) deposits is estimated at approximately $18-19 billion over five years,” said Payal Pandya, Vice President, Research at Bajaj Broking Prime.However, analysts are quick to point out that this figure is not set in stone, as the actual economic cost will depend on several factors. Chief among these is the movement of the rupee against the US dollar over the next five years.As Pandya put it, “this should be viewed as a notional estimate of the hedge support extended by RBI rather than its eventual economic loss. The realised cost will depend on factors such as reserve earnings and the path of the USD-INR exchange rate over the tenure of the swaps.”Maahir Mani of Deven Choksey agrees.Mani also argues that while the swap facility appears to have succeeded in attracting substantial foreign-currency funds, the cost could ultimately be reflected in the government’s finances. This is likely to become apparent only when the deposits mature, potentially three or five years from now.That is because the RBI is expected to bear the cost of the forex swaps through its balance sheet rather than through a separate fiscal allocation. “There is no upfront cash outflow for the RBI. It earns interest on the dollars today, while the eventual cost could show up around 2031 through a lower dividend to the government,” he said.Also Read: RBI forex swap pulls in whopping $136.4 bn, FCNR(B) deposits make up 93%The RBI’s eventual cost could also be partly offset by earnings from the additional foreign-currency reserves. “RBI acquires the foreign currency inflows, which augment foreign exchange reserves and generate investment income over time. Consequently, the net economic impact will depend on returns earned on the additional reserve assets, the path of the USD-INR exchange rate, and the final settlement outcome of the swap book,” Pandya said.So, while back-of-the-envelope calculations point to the scheme costing the RBI around ₹2 lakh crore, this remains an estimate of the implied subsidy rather than the final economic loss. The actual cost will become clearer as the swaps mature and the RBI’s reserve earnings and exchange-rate movements play out.

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