The $127 billion foreign currency non-resident (bank) (FCNR(B)) deposits mobilised through the Reserve Bank of India’s (RBI’s) concessional swap scheme could generate a notional profit of around ₹5 trillion for banks over five years, according to SBI Research.
The $127 billion deposits could support around ₹25 trillion of additional bank credit. At a 7.5 per cent yield, this could generate about ₹1.8 trillion in income each year, SBI Research estimated. After accounting for interest outgo of around ₹75,000 crore a year on the deposits, the report estimates an effective net interest margin (NIM) of about ₹1 trillion annually, or ₹5 trillion over five years.
“Taking a watered down, time lagged credit multiplier of 2.5 these deposits can result in additional credit of say Rs 25 lakh crore (trillion) and an effective yield of 7.50 percent, result in accretion of notional yield of Rs 1.8 trillion per annum to the banks,” SBI Research said in a report released on Friday.
The report estimated the additional interest cost at around ₹1.75 trillion and the foreign exchange depreciation cost at ₹3.18 trillion, based on an assumed 5 per cent annual depreciation of the rupee over five years.
The report said the RBI’s special USD-INR swap facility was designed to hedge the exchange-rate risk associated with the deposits. Therefore, a subsequent depreciation of the rupee should not be treated as an additional FCNR(B)-specific cost over and above the hedging cost.
“Once the exchange-rate risk on the principal has been hedged through this mechanism, a subsequent depreciation of the rupee does not generate an additional contractual loss on the principal for either counter parties (Banks or the RBI),” SBI Research said.
The research report estimated the cumulative hedging cost of the $127 billion mobilisation at around $15 billion. The calculation assumes an average annual USD-INR hedging cost of 3 per cent and divides the deposits into one-year, three-year and five-year maturity buckets.
For the Reserve Bank of India (RBI), the report estimated that investing $100 billion of the funds in globally investible avenues at a 4 per cent yield over five years could generate around $20 billion. After accounting for the estimated $15 billion hedging cost, this would leave a surplus of around $5 billion, or ₹50,000 crore, for the central bank’s balance sheet.
“Thus, overall profit to banks is a notional Rs 5 trillion and to RBI another Rs 0.5 trillion,” the report said.
The report also said the large inflow of liquidity from the scheme could be absorbed over time through festive-season demand, credit disbursal pipelines, new loan sanctions and government-related outflows such as advance taxes and GST.
The report said the FCNR(B) mobilisation could support credit growth and reduce banks’ dependence on other forms of wholesale borrowing. The scheme mobilised $127 billion in less than three months before the RBI brought forward the closure of the deposit window.
