New Delhi: The FCNR (B) deposit scheme mobilised $127 billion within a short span of less than three months, which could generate a notional profit of around Rs 5 trillion (Rs 5 lakh crore) for banks over five years, and another Rs 0.5 trillion (Rs 50,000 crore) for the RBI, according to a report by SBI Research.
The report said the success of the scheme had become a point of contention for critics who had raised concerns over its costs and implications.
“Even though the regulator took a wise decision to curtail the scheme preponing its closure, the mammoth fund flows eclipsed the frontier calculations, with the needle immediately shifting to the cost(s) architecture as being pushed by the lobby of naysayers,” the report argued.
SBI Research Examines Concerns Over FCNR (B) Scheme
The report examined the arguments raised by critics across four areas before assessing broader factors that, according to SBI Research, contribute to resilient macroeconomic conditions.
“Firstly, the cost of the Scheme and Benefits to Banking System. The cost and price attributed to the scheme is a distraction at best going by common prudence and evolving landscape of elevated borrowing costs across global markets,” said the SBI report.
The report said the cost of the FCNR (B) scheme primarily has two components: interest outgo through the contractual maturity period at contracted rates of interest and the hedging cost.
High Global Borrowing Costs Make Deposits Attractive
According to the report, dollar-denominated yields across global markets are currently around 7.5-8 per cent for AAA-rated corporates, amid elevated borrowing by multiple actors.
This makes FCNR (B) deposits at 6-6.5 per cent attractive, the report said. It added that the elevated cost of bulk borrowing in local markets, which accounts for 38 per cent through bulk deposits, could moderate through these liquidity pools, potentially having a sobering effect on overall systemic pricing of wholesale deposits and certificates of deposit.
SBI Research Rejects Double-Counting of Hedging Costs
The report also rejected arguments concerning hedging costs and currency depreciation.
“Secondly, the logic of the naysayers regarding hedging cost and adding back depreciation and ascribe it to a notional loss of Rs 5 trillion is ‘completely incorrect’,” the report said.
It explained that once liabilities are hedged by counterparties, with back-to-back hedging being prevalent, the direction of the currency becomes immaterial on the maturity date.
According to the report, counting both the cost of hedging and currency depreciation against the same exposure does not provide a meaningful interpretation.
FCNR (B) Liquidity Expected to Support Credit Demand
SBI Research also addressed concerns over the sudden inflow of liquidity into the banking system.
“Thirdly, the gush of (unanticipated) liquidity is being portrayed as a challenging feat to the system,” the report noted.
However, it said the liquidity could be absorbed through various channels, including festive-season demand, the credit disbursal pipeline, new advance sanctions, and outflows related to advance taxes and GST payments.
These factors, according to the report, could help align the additional liquidity with elevated systemic liquidity and support credit management by banks.
RBI Could Also Gain From Dollar Investments
For the RBI, the report estimated that deployment of around $100 billion in globally investible avenues at a yield of about 4 per cent over five years could generate $20 billion in returns.
The report said this could offset the estimated $15 billion hedging outgo and potentially add around $5 billion, or Rs 50,000 crore, to the RBI’s balance sheet.
“It may be noted that RBI’s investment of the dollars received (hedge was allowed in USD only) is open to permitted avenues as per its board approved policy only and not at the whims of the naysayers,” the report said.
It added that given the high-yield environment, current investments could earn higher returns than those envisaged in earlier calculations.
Overall, the report estimated a notional profit of around Rs 5 trillion for banks and another Rs 0.5 trillion for the RBI over five years.