FCNR Deposits Beat Estimates, RBI To Pull Out Rs 6-7 Lakh Crore: Pranjul Bhandari

Foreign Currency Non-Resident (Bank), or FCNR(B), deposit inflows have comfortably beaten estimates, leaving the Reserve Bank of India (RBI) with a fresh problem of its own making, too much liquidity sloshing around the banking system. According to Pranjul Bhandari, Chief India Economist at HSBC, the central bank will need to pull out Rs 6-7 lakh crore over the next 10-15 days to stop the surplus from turning inflationary.

"So many dollars came in, I think domestic banking sector core liquidity could go to about 14-15 lakh crore in the next couple of days. That's a very strong number," Bhandari told NDTV Profit.

The same wave of dollars has pushed up the country's foreign exchange reserves, which Bhandari expects to be "just short of $800 billion dollars" by mid-September. She said the RBI has "shown the intent that it wants to spend these dollars to stabilise the currency or even strengthen it," giving the central bank room to manage the rupee and the liquidity overhang at the same time.

The trouble, Bhandari explained, is that overnight rates have fallen sharply on the back of the surplus, and that cannot be allowed to persist. "You don't want them to be so low for so long because they become inflationary, and they lead to other imbalances," she said, cautioning that excess credit could flow into "subprime sectors" that don't need it.

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Markets, she said, are already anxious about how the RBI will respond. "Everybody is thinking about what is it going to be, but that is going to be the big question, how does RBI suck out about 6 to 7 lakh crore of liquidity over the next 10-15 days. My sense is we will hear about it next week," Bhandari said.

She flagged two likely routes. The first is spot intervention, selling dollars to support the rupee, which by her estimate could remove close to Rs 3 lakh crore over the next three months. "For every $10 billion dollars that the RBI intervenes, it sucks out Rs 1 lakh crore," she said. The second is an incremental hike in the cash reserve ratio (CRR), the share of deposits banks are required to park with the RBI, of roughly 1% of GDP, which could absorb another Rs 3 lakh crore. "Between these two, you can take out 6 lakh crore from the market," Bhandari said.

Looking beyond the near-term mop-up, Bhandari warned against reading too much into the FCNR(B) windfall, calling it a one-off rather than a durable source of dollar inflows. "Now that the FCNR window is shut, where will the next inflows come from? We need something more sustainable, and exports can help here," she said, pointing to India's pending trade agreements as the more lasting route to shoring up the currency.

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