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e stares at roller-coaster ride on FCNR, exporter rollovers

MUMBAI:The rupee may turn volatile by 2016-end.

The maturing of about $26 billion foreign currency non-resident (FCNR) deposits from September to November is expected to keep foreign exchange (forex) markets on tenterhooks.

Forex dealers say that a decline in exports could result in exporters rolling over many forward contracts that may be maturing in September to November, when about $26 billion FCNR deposits are set mature. Goods exports from India declined 6.74% over the preceding year to $20.56 billion in April 2016, falling for the 17th consecutive month as global demand remained muted.

On Thursday, the rupee opened stronger at Rs 66.58 to the dollar but the gains were shaved off by the demand for dollars by oil companies and importers leading to the unit closing flat at Rs 66.72.

Soumya Kanti Ghosh, economist at SBI, said in a report released on Tuesday, “Declining export performance could be already adversely affecting the exporters’ ability to handle the currency woes and hence there is the possibility of forward contracts getting rolled over. Under such an eventuality, if RBI intervenes in the market to provide dollar liquidity from its reserves, it could in turn trigger a liquidity squeeze in the rupee money market.”

A forex dealer said, “The markets are watching both the US Fed rate actions also the maturing of the FCNR deposits. Today the gains were taken off by the oil marketing companies and also some importers who came in during the afternoon trade.”

Maturing of FCNR deposits this year may have a significant impact on liquidity conditions. To protect a falling rupee the RBI had in September 2013 opened a window to banks to swap the fresh FCNR dollar funds. During the period the window was open, banks mobilised $34.3 billion and swapped them with the RBI. Despite the RBI hedging its swap positions, there may be maturity mismatch in these positions and this could lead to disruptions in Indian forex and money markets.

Standard Chartered Bank said in a report, “We believe the markets are more concerned about rupee liquidity in the banking system. The liquidity deficit has narrowed in line with the RBI’s revised stance since April on an accelerated pace of bond buybacks and government spending. We expect the deficit to narrow further until September. However, a fresh rupee liquidity shortage may emerge from September-November on FCNR deposits redemptions of $26 billion. Any RBI guidance on how it plans to manage this will likely ease market concerns.

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