The Indian banking system has left a $10-billion position unhedged amid foreign exchange deposit redemptions, making the rupee vulnerable to a sudden depreciation in the next few months.

On the other hand, such a drop would act as a booster for exports and possibly narrow the trade deficit although imports of oil and other commodities would become costlier, said experts, some of whom suggested the gap may have deliberately been left uncovered.

Three years after the Reserve Bank of India sought to shore up the rupee through foreign currency nonresident-bank (FCNR-B) deposits, the country is bracing for an outflow as these get redeemed. The rupee was at 66.72 a dollar on Friday.

Experts baffled by RBI move, The Indian currency was at 66.68 a dollar a week back and may weaken to 67.50-68.00 a dollar by December, dealers said.

According to a note prepared by one of India’s top private sector banks, there’s a $9.5-billion gap between $22.4 billion of FCNR-B maturities and $12.9 billion of forward contracts for October and November.

“There is high possibility of a systemic rupee depreciation in the coming months on account of FCNR-B outflows,” said KN Dey, executive director at Mecklai Financial. “The rupee has been steady for almost 10 months and a fall will boost exports and in turn, reduce trade deficit.”

Export push, A fall in the rupee should make Indian goods more competitive in the global market. Indian exports revived in September to grow 4.62 per cent on year to $22.8 billion with 18 of 30 exporting sectors showing growth.

This was the second instance of growth this year after June when exports rose 1.27 per cent after declining 18 months in a row. With a 2.5 per cent fall in imports to $31.2 billion, the trade deficit stood at $8.33 billion in September.

The hedging shortfall will generate dollar demand in excess of what flows in regularly via overseas investments and non-resident deposits, said a senior bank executive.

The rupee, therefore, is likely to come under pressure, having remained in a tight band since January despite the Chinese devaluation.

Citing RBI data for August end, the bank report cited above said forward long contracts for September were worth $2.9 billion against $2.1 billion in FCNR-B repayments, but those in October-November are at $12.9 billion against $22.4 billion of maturing deposits. For December and beyond, forward longs stood at $13.3 billion versus $2.3 billion in repayments.

(~ News – BBC~)




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