Acute dollar shortage to continue in India
Foreign exchange dealers estimate that Indian banks are facing a shortfall
of about $200 million every day for the past month
Mumbai: Call it the incredibly scarce greenback.
While the Indian central bank's foreign exchange reserves stand at a
record
$301.2 billion with at least $100 billion having been added during the
current fiscal year, there is an acute dollar shortage in the market.
"There is hardly any dollars in the market. The banks have no dollars to
lend to cor****ations," says the India chief executive of a large foreign
bank who didn't want to be identified. Foreign exchange dealers estimate
that Indian banks are facing a shortfall of about $200 million every day
for
the past month.
Meanwhile, the rupee fell 0.70% to close at 40.52/53 to a dollar on
Friday,
its lowest in six months, taking cues from the falling equity markets.
EQUITY IMPACT (Graphic)
The dealers are blaming the Reserve Bank of India (RBI) and the finance
ministry's policy of curbing dollar inflows for the systemic shortages.
While the curb on external commercial borrowings (ECBs) considerably
slowed
the inflow of dollar funds, the sub-prime crisis that continues to rock
the
world's financial system virtually shut the door for Indian firms for
foreign currency convertible bonds (FCCBs).
"The shortage of dollars has persisted for almost a month, primarily owing
to outsized capital outflows in the past six weeks. The situation will
correct only when inflows recover sufficiently or the RBI supplies dollars
.... To be sure, the worst of the dollar shortage is likely behind us but,
it
is still uncertain when onshore dollar liquidity fully normalizes," said
Vikas Agarwal, an analyst with JPMorgan Chase Bank.
However, there are others who say that the situation will worsen in the
second half of March when the rupee liquidity will tighten on account of
advance tax outflows. Indian firms pay advance cor****ate tax every quarter
and analsysts say the quantum varies between Rs40,000 crore and Rs50,000
crore, depending on the profitability of companies. "With rupee liquidity
tightening, RBI may not like to rollover its forward purchase of dollars
as
part of its sell-buy swaps in the market," pointed out the dealer at the
private bank.
Meanwhile, there are other factors that have also contributed to the
dollar
shortage.
One of them is a considerable slowdown in the flow of money from
non-resident Indians, or NRIs. They are remitting less money to India as
interest rates offered on so-called NRI deposits have come down sharply.
For
instance, until mid-April 2007, NRIs were offered 25 basis points less
than
the Libor (London Interbank Offered Rate) on their dollar deposits. Now,
the
rate is 75 basis points less than Libor.
To add to their woes, with the cut in US Fed rates, six-month Libor has
come
down from 5.30% a year ago to 2.88% now. This means, interest rate on
six-month dollar deposits or FCNR(B) deposits has come down sharply from
5.05% to 2.13% in one year. The US Fed rate has come down from 5.25% to 3%
since September 2007.
Between April and December, 2007, there was an outflow of $364 million
from
Indian banks' FCNR(B) deposit ****tfolio. In the corresponding period of
the
previous year, there was an inflow of $1.6 billion. "The story is very
similar in other NRI deposits too," said a foreign exchange dealer with a
new private bank who too didn't want to be identified. There are two other
NRI deposits-NRO and NR(E)RA-and banks have brought down interest rates on
both in the past one year. Overall, there was an outflow of $816 million
in
the April-December period compared with an inflow of $3.7 billion in the
corresponding period of the previous year.
Another factor in the dollar shortage is that foreign institutional
investors (FIIs) areturning net sellers in the Indian equities.
Since the beginning of this year, FIIs have net sold $3.3 billion worth of
equities. In 2007, they had bought a record $17.5 billon worth of Indian
equities net of sales.
Meanwhile, RBI has been conducting sell-buy swaps in the foreign exchange
market to drain liquidity. The sell-buy swaps postpone the creation of
rupee
liquidity immediately after RBI's intervention in the foreign exchange
market. The swap involves selling dollars with a simultaneous agreement to
buy them back at a future date at a specified price. This is nothing but a
forward contract.
When the time comes to buy back these dollars, RBI reviews the liquidity
situation and either roll over such swaps or convert the dollars into
local
currency.
"If it rolls over the contract, dollars will remain in the system but
since
RBI may like to generate rupee liquidity to take care of the tem****ary
tightness that will be created on account of advance tax outflows, it will
buy back the dollars. This will worsen the dollar shortage," the dealer
said.
In August 2007, the finance ministry introduced stringent norms for Indian
companies raising cheap dollar loans through the ECB route. Now ECBs of up
to $20 million are permitted with a minimum average maturity of three
years,
and over $20 million and up to $500 million per borrower are permitted
with
a minimum average maturity of five years.
There were also restrictions in terms of use of ECBs. The government
stipulated that the ECB proceeds can be used primarily for im****t of
capital
goods, new projects, modernization or expansion of existing projects in
the
realty sector and for the infrastructure industry.
ECBs accounted for $16 billion out of the $36 billion foreign exchange
inflows in 2006-07. In the April-September 2007 period, loans raised via
ECB
were about $10 billion.
Harihar Krishnamurthy, head of treasury at Development Credit Bank, said
the
ECB routes should be opened up and NRI deposits be paid higher interest
rates.
http://www.livemint.com/2008/03/08004507/Acute-dollar-shortage-to-conti.html
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