Indian banks are urging the Reserve Bank of India to remove a guarantee restriction that has been in place since 2013, according to reports from The Economic Times. The banks are specifically asking for relief from the standby letter of credit (SBLC) curb that was imposed following the 2013 FCNR scheme. This move comes as New Delhi and RBI explore ways to manage rupee volatility, with banks seeking to revive a special deposit scheme for foreign currency non-resident accounts to increase dollar supply. A senior banker told ET that while RBI didn't explicitly say it was opening a FCNR window, banks said FCNR may be a quicker route to bring in dollars, but would be expensive. The banker noted that subsidising hedging costs of dollar bonds and external commercial borrowings by PSUs and corporates may cost less though dollar inflows could take longer.
The SBLC mechanism, which was largely discontinued for FCNR following RBI's instruction, allowed overseas banks to obtain credit comfort from Indian banks to lend to NRIs who placed borrowed funds as FCNR deposits. As reported by The Economic Times, NRIs previously took huge leverage of four to ten times the amount invested, with an NRI in Dubai contributing $100,000 while borrowing $900,000 from a UAE bank to place $1 million as deposit. The arrangement allowed offshore banks to directly receive funds from Indian banks, with the SBLC covering credit risk for the UAE bank. Without SBLC, there won't be leveraging, and without leveraging there won't be enough FCNR inflows, according to bankers quoted by The Economic Times.
According to bankers quoted by The Economic Times, the gap between US and Indian interest rates has narrowed significantly compared to 2013, making the FCNR route potentially costly. Banks have suggested that subsidising hedging costs of dollar bonds and external commercial borrowings by PSUs and corporates may be more cost-effective than the FCNR route, though dollar inflows could take longer. A senior banker told ET that there's a sense the RBI and the government want to be ready with all information so that the rollout, if needed, can be quick. They don't want any step to be seen as a panic reaction. The banker noted that if oil stays around $90, they may not take big measures.
Market observers suggest that if oil prices harden, Middle East conflict continues, and the rupee remains under pressure, RBI may announce measures on May 6 alongside the monetary policy announcement. As reported by The Economic Times, speculation includes controlling outflows through lowering the $1 billion annual limit on Overseas Direct Investments under the automatic route and cutting the maximum single ODI from four times the net worth. Additionally, earlier conversion of dollars into INR in Exchange Earners' Foreign Currency Account is being speculated. A banker noted that there are talks about controlling outflows, but there's corporate lobby resisting ODI and LRS cuts, and RBI and the Centre could try avoiding measures that appear as capital controls.
