India faces repayment trouble in September

New Delhi: The looming expiration of an emergency liquidity measure introduced during India’s 2013 currency crisis comes at a risky time for the rupee, with about $20 billion in deposits expected to leave the country as global investment appetite worsens. Analysts warn that the rupee already Asia’s worst performing currency against the US dollar this year — continues to look vulnerable ahead of September, when dollar term deposits that India raised from citizens abro-ad in 2013 start to mature.

The outflows, though widely anticipated by both markets and policymakers, will present a near-term currency challenge for Reserve Bank of India (RBI) governor Raghuram Rajan, whose position is also up for renewal in September. “It’s a well anticipated event and the flows are largely known. Still, investors will be watching this carefully to see how the Reserve Bank handles the liquidity situation,” said Luke Spajic, head of portfolio management emerging Asia at PIMCO.

Dr Rajan announced the initiative to shore up foreign reserves soon after taking over the RBI in Sep-tember 2013, when fears of US Fed rate hikes punished vulnerable emerging markets such as India. Under the programme, banks were incentivised to offer dollar deposits to Indian citizens abroad — through instruments kno-wn as foreign currency non-resident bank depo-sits — in a scramble to boost liquidity and regain the confidence of foreign investors.

The RBI then exchanged those dollars for rupees at lucrative rates for bank-ers. With about $28 billion in deposits maturing in September through to November, the RBI must provide dollars to the banks so they can pay back those depositors. Dr Rajan said last week he expected $20 billion in outflows in September to November, more than three times the outflow volumes seen over a three-month period. He will need to manage those outflows carefully at an especially tricky time for global markets with US rate hikes and worries about China and low oil price.