Halister News

(Bloomberg) -- Urjit Patel, who takes over as RBI governor on Sept. 4, will face his first major test next month as an estimated $26b deposits raised from non-resident Indians in 2013 start to fall due.

• RBI estimates about $20b of these deposits will flow out at maturity
• While the central bank has pro-actively raised dollars to meet these obligations, analysts point that mismatches may lead to periodic dollar or rupee shortages
• Patel is no stranger to the event risk, having worked closely with Rajan and was deputy governor for monetary policy through the latter’s tenure

• Background
  • RBI raised funds from non-residents in 2013 to support the plunging rupee as global risk assets tumbled after Bernanke signaled the Fed may begin tapering QE
  • $25b of non-resident dollar deposits will mature between Sept-Dec with 81% concentrated in Oct-Nov, according to Yes Bank estimates in a note dated Aug. 23
  • RBI offered concessional swaps to banks in 2013 to raise the deposits on its behalf; it will now need to repay dollars to these banks which will be returned to the non-residents
  • RBI has bought dollars in forwards market to prepare for this; between Nov. 2013 and June 2016, it reduced its net forward USD position to -$7.4b from -$32.5b

• Potential Pressure Points

• Dollar Liquidity Shortage
  • RBI may not get dollars in time from one set of banks to pay the others due to mismatch of maturity profiles
  • Dollar shortages may also occur as exporters typically deliver part of their contracts and rollover the rest
  • HSBC estimates that of the $24b due from FX traders in 2016, RBI has taken delivery of about $5b, according to Aug. 17 note
  • RBI has more-than-sufficient FX resources to cover any short-term liquidity needs resulting from maturing FX swaps, Nomura wrote in a note dated Aug. 21
  • NOTE: India’s FX reserves reached a record $366b on Aug. 12

• Rupee Liquidity Shortage
  • RBI’s supply of forex to banks may suck rupee liquidity from the banking system
  • Yes Bank says RBI can let the rupee liquidity system sit in surplus before the maturities fall due, and accelerate OMO purchases during Oct-Nov

• Decline in Bank Deposit Growth
  • Foreign currency non-resident account outflows worth 1.6t rupees is likely to result in a cumulative decline of 1.8% in bank deposit growth: Yes Bank
  • Bond holding rules for liquidity coverage ratio requirement have been relaxed, providing some leeway for banks, HSBC says
  • In July, RBI raised the ratio of deposits that banks are allowed to use for liquidity coverage ratio requirement to 11% from 10%

• Global Risk Event
  • Residual risks remain, such as a strong global risk-off scenario coinciding with the maturities, resulting in possible dollar shortage, Badrinivas Nallan Chakravarthy, head of local markets treasury at Citigroup said in an interview
  • Even so, impact is likely to be in the forwards market rather than spot; RBI has contained the risks very well: Citi

• Repeat of India Millennium Deposit Scheme?
  • A similar program called India Millennium Deposits led to an estimated $7b outflows in Dec. 2005; even so, rupee rose 2% vs USD that month
  • While the current maturity is 3.6 times that of IMD, the ratio to RBI’s foreign currency assets is likely around 7% vs IMD at 5.1%: Yes Bank