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Raghuram Rajan's rupee gamble may help lure $30 billion
  MUMBAI: Reserve Bank of India governor Raghuram Rajan's doubling of borrowing limits for banks and the easier norms to tap non-resident bonds may draw as much as $30 billion in the next three months, providing a much needed breather to fix the currency.

Private banks such as ICICIBSE 5.15 %, Axis and even the State Bank of IndiaBSE -0.63 % may be among the lenders which may use the window opened by the new governor to raise US dollars by bond sales which could fetch as much as $20 billion, said analysts. No bank has declared its intention to use the window so far. Rajan's offer to hedge foreign exchange deposits of the banks at a fixed 3.5% for three years may lure another $10 billion, estimate economists.

"An enhancement in the overseas borrowings would mean additional borrowings possible for the banking sector in foreign currency," said Mohan Shenoi, treasury head, Kotak Mahindra BankBSE -0.10 %, who had estimated that even if a quarter of it is used about $25 billion could flow into the country. Rajan, on Wednesday, moved to shore up the rupee which was among the worst-performing currencies in the world after foreign investors began to pull out funds as tapering of the quantitative easing in the US turned imminent.

Banks can now borrow up to 100% of their Tier I capital, from 50% forex-denominated FCNR B of three years and above at a fixed hedge cost of 3.5 %. The rupee gained 1.6% to 60.01. The special swap window for the so-called FCNR (B) deposits, probably to offset the US dollar sales to oil companies under a swap agreement, could lead to substantial flows as it did during previous such moves.

This should add about $10 billion to forex reserves and rein in rein expectations around current levels," said Indranil Sen Gupta, economist, Bank of America Merrill Lynch. "This brings to fruition our standing call that the RBI would need to mobilize forex reserves by launching a NRI deposit scheme in which the rupee risk is borne by it or the government."

During April-June there were net outflows of $101 million compared to an outflow of $696 million in the same period last year. The outstanding FCNR B deposit in the system is $15 billion, almost one-third of the NRE deposit. According to Sengupta, the cost of FCNRB deposit mobilisation will come to 8.5%. RBI has liberalised norms on NRI deposits to get inflows.

In April, it had exempted deposits under the scheme from the requirement of cash reserve ratio and statutory liquidity ratio. If banks lend at 11%, they will likely make the entire 250 basis points spread as FCNRB deposits will not attract CRR or SLR for now. The currency is expected to gain from the inflows. Similar schemes, like the 1998 Resurgent India Bonds and the 2001 India Millennium Deposits were effective in the past. They had raised $5 billion each."