Banks have put forward several proposals to the government on how to attract $30–$50 billion in foreign exchange, with most suggestions involving the central bank subsidising the hedging cost of foreign exchange. While the interest rate differential between India and the US is now far less than the 4–5% seen in 2013, bankers note that macroeconomic fundamentals are strong and will facilitate wholesale borrowing.
Lessons from 2013: FCNR-B Deposits
In 2013, the Reserve Bank of India (RBI) managed to reverse the tide through foreign currency non-resident (FCNR-B) deposits at a pre-determined rate, enabling banks to deploy the rupee proceeds. Ashishh Vaidya, head of treasury at DBS India, suggested an alternative: Instead of a broad-based FCNR(B) scheme, the RBI could conduct swaps with the proceeds of foreign borrowing by public sector enterprises, particularly oil companies, through external commercial borrowings or foreign currency borrowings. He explained, 'The cheaper borrowings will offset their losses on product sales, the capital will be useful to increase domestic capacity and at the same time boost forex reserves by $30bn to $40bn.'
Impact on Market Sentiment
A scheme to raise funds in tens of billions is seen as crucial to change market sentiment. According to Vaidya, 'Once the inflows come in, it will also release another $30–$40 billion locked overseas because of leads and lags by importers and exporters.' Other suggestions include the removal of withholding tax on foreign investment in debt to encourage flows.
UBS Report: Reverting to 2013 Playbook
Earlier this month, UBS, in a report, stated that the RBI could revert to its 2013 playbook to attract inflows. During the 2013 taper tantrum, the RBI announced several measures to restore external stability and arrest the sharp depreciation. Key steps included:
- An increase in the Marginal Standing Facility (MSF) rate and bank rate by 200 basis points to 10.25%.
- Issuance of fresh FCNR (B) deposits with a minimum tenure of three years and above, offered at a fixed rate of 3.5% per annum. This scheme garnered approximately $26 billion, providing a significant buffer to foreign exchange reserves.
- A special foreign exchange swap window for oil marketing companies (OMCs) to meet their daily dollar requirements, reducing pressure on the spot forex market.
- Deregulation of interest rates on NRE/NRO deposits.
- Aggressively raising import duty (from 4% to 15% in phases) and restricting gold imports.
- Subsequent policy rate hikes.
These historical measures highlight the toolkit available to the RBI to manage forex inflows and outflows. The current proposals from banks suggest a tailored approach leveraging public sector enterprises and reducing hedging costs to achieve similar results in today's economic environment.
