FCNR inflows to keep cap on bank deposit rates

The liquidity generated due to the inflows from the foreign currency non-resident (bank) (FCNR B) deposits will ensure that remain at the current levels at least for another two to three months despite the by the (RBI).

Banks will however benefit from higher lending rates especially on as these will automatically reprice tailing the rate hike. With deposit rates not increasing soon, bank margins will increase. As much as 54% of floating rate loans for public sector banks and 91% of floating rate loans by private sector banks are linked to the repo rate, Macquarie Securities said in report on Wednesday.

In a post policy press conference RBI governor said that high credit growth in the banking system is already indicative that FCNR (B) deposits are being used by banks for lending. at 18% currently is higher than the 10% reported a year earlier.

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Malhotra said the $133 billion amount banks got through this scheme is so large that RBI does not want banks to use it overnight doing proper due diligence but rather take their time to use these deposits. “There is surplus liquidity today but we do not believe this is a very long term phenomenon because of natural reasons like and reserve requirements of banks through our various operations whether it is spot (rupee) or sell-buy operations which we use, this liquidity will get drained,” Malhotra said.

He added that expects a large amount of the surplus liquidity to get drained out from the banking system within this financial year. “Without getting too much into numbers, Rs 3 lakh crore to Rs 4 lakh crore is the general currency in circulation leakage. Then with our operations like sell-buy, open market operations and variable rate reverse repo (VRRR) and spot intervention we do to support the rupee, I do not expect that the liquidity is going to remain in such high surplus for a very long period of time,” Malhotra said.

Bankers too expect the liquidity situation to change by the end of December. “There is little scope for deposit rates and non repo linked lending rates to move now. In a way the rate hike today was an adjustment to the market rates which had already moved up. But our expectation is that by the end of December liquidity will be back to neutral or a small deficit as this large surplus will go away,” said Alok Singh, head of treasury, .

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Malhotra however did not rule out any liquidity action including hiking the cash reserve ratio (CRR) but said that it is one of RBI’s least preferred mode to take out liquidity. “FCNR B also raised some questions on costs but that is not our primary motive. I would request all of you to look at the overall benefits to the economy of whatever operations we do whether it is FCNR (B), liquidity operations, monetary policy change, macro prudential measures we may take. The profit or surplus is incidental. The primary purpose is the impact on the economy as a whole,” he said.