Can Shaktikanta Das Save Rupee By Taking A Leaf Out Of Raghuram Rajan's Book?

The current free fall of the rupee against the dollar is like history repeating itself -- in 2013, the rupee had plunged to a life-time low due to the US ‘taper tantrum'. At that time, India had mobilised $30 billion through foreign currency non-resident bank account (FCNR-B) deposits by offering a special swap window for banks. The FCNR-B scheme was considered a masterstroke by the then RBI Governor Raghuram Rajan, who announced it to stabilize the rupee as soon as he took charge of the coveted post.   

Just like the problem, the solution, too, is being taken from the aisles of history. Following Rajan’s footsteps, the current RBI Governor Shaktikanta Das has also allowed banks to temporarily raise money through fresh Foreign Currency Non-Resident Bank accounts FCNR(B) and Non-Resident External (NRE) deposits without reference to the current regulations on interest rates, with effect from July 7. This relaxation will be available till October 31, 2022.  

Currently, interest rates on FCNR(B) deposits are subject to ceilings of Overnight Alternative Reference Rate (ARR) for the respective currency/swap plus 250 basis points for deposits of 1 year to less than 3 years maturity and overnight ARR plus 350 basis points for deposits of 3 years and above and up to 5 years maturity.  

The central bank also exempted banks from maintaining cash reserve ratio (CRR) and Statutory Liquidity Ratio (SLR) with reference to FCNR (B) and NRE deposits. "It has been decided that with effect from the reporting fortnight beginning July 30, 2022 incremental FCNR(B) and NRE deposits with reference base date of July 1, 2022 will be exempt from the maintenance of CRR and SLR. This relaxation will be available for deposits mobilised up to November 4, 2022. Transfers from Non-Resident (Ordinary) (NRO) accounts to NRE accounts shall not qualify for the relaxation," RBI said.  

Following the announcement, HDFC Bank, the country's largest private sector lender has announced a dedicated two-day window to gather NRE deposits offering up to 50 basis points more interest than existing rates (ET reported). HDFC Bank's decision comes amid US Federal Reserve's decision to increase interest by 75-100 basis points to combat inflation, which is at four-decade high in the US.  

HDFC Bank proposes to pay 6.8 per cent annually and it expects non-resident Indians to utilise this two-day window to invest in NRE deposits with tenors of 12-15 months. Currently HDFC Bank offers 5.75 per cent interest on tenors of 12-15 months for deposits made equal to Rs 2 crore to less than Rs 5 crore.  

The move by HDFC Bank follows the Reserve Bank of India's decision to relax foreign investment in debt, external commercial borrowings, and Non-Resident Indian (NRI) deposits to stem the rupee's fall against the US dollar.  

Interestingly, Rajan was very skeptical about the idea of raising deposits from NRIs because of its cost to the exchequer. "I thought this is bankers coming in again to get one of the sweet deals which will help them. They will go out and raise the money. They will get fantastic bonuses and we will end up paying for it," he had said in 2016.  

He thought the idea to be "completely idiotic" as it was akin to giving 3.5 per cent subsidy to bankers and it was "the worst of the ideas on the table", which made him request Subbarao to announce it while departing.