Other details of the scheme
Benchmark: CRISIL Balanced Fund Index
Entry Load: Nil
Exit Load: 1% for exit up to 365 days from the date of allotment
Minimum Initial Purchase: Minimum of Rs.5,000/- and in multiples of Re. 1/- thereafter.
Additional Purchase Amount: Minimum of Rs.1,000/- and in multiples of Re. 1/- thereafter.
Maximum total expense ratio (TER) permissible under Regulation 52 (6) (c) (i) and (6) (a) Upto 2.50%
Additional expenses under regulation 52 (6A) (c) Upto 0.20%
Additional expenses for gross new inflows from specified cities Upto 0.30%
Capital preservation is the cornerstone of successful investing. Think in terms of risk of...
While the measures announced by RBI to open a swap window to attract FCNR-B dollar funds can help augment capital inflows and cushion the funding pressures to some extent in the near term, India’s balance of payments remains as vulnerable as ever
Yesterday, Raghuram Rajan took over as the governor of the Reserve Bank of India (RBI) and announced various measures. According to brokerage firm Nomura, the main positive policy announcement for the Indian rupee in the RBI governor Rajan's speech was that the central bank would offer a swap window to banks for new foreign currency non-resident (B) dollar funds (3-year maturity and above) at a fixed annual rate of 3.5%. This scheme is expected to be open until 30th November and could lead to an estimated $10 billion of inflows. Of course, while this will substantially help fund the current account deficit, Nomura remains skeptical about any sustained rally in the rupee because of the continued poor fundamentals from weak growth to the fiscal and current account deficits. There could be more ad hoc measures to support the rupee in the near term through to the 20th September monetary policy meeting. The risk is that market expectations remain high, remarks Nomura.
According to Morgan Stanley, while the increase in real rates will help to narrow current account deficit (CAD) over the next four to six months, in the interim, India will remain exposed to funding risks.
"In order to manage the near term funding risks, we have been highlighting the need to augment capital flows through a special scheme of non-resident Indians (NRI) dollar deposit (with the government bearing part of the FX risks) which can raise about $20 billion. The measures announced by RBI are somewhat similar in nature and can help augment capital inflows and cushion the funding pressures to some extent in the near term," the investment bank and financial services provider said in a research note.
According to the report, the indicators to watch to assess funding risk for India are (a) Monthly trade deficit, (b) CPI inflation (c) measures to augment capital inflows and (d) US 10Y yields and US trade weighted dollar index.
Swap window for FCNR deposits:
Under the FCNR scheme, NRI are allowed to hold deposits in foreign currency, thus avoiding exchange rate risks. On 14th August, the RBI had liberalized the interest rate on FCNR deposits (for three to five year maturity) to LIBOR/swap plus 400 bps from LIBOR/swap + 300bps.
According to the RBI, banks had requested it to consider a special concessional window for swapping FCNR deposits that will be mobilized after interest rate liberalization. The RBI thus announced the offer of such a window to the banks to swap the fresh FCNR (B) dollar funds, mobilized for a minimum tenor of three years and over at a fixed rate of 3.5% per annum for the tenor of the deposit.
How will it work?
The RBI is trying to provide FX cover to banks at a reasonable cost so that they can collect dollar deposits in normal course and convert them into rupees using this FX cover. The RBI will provide the cover at 3.5% p.a., well below current market hedging costs of about 7%. For banks, the cost of deposits in rupee terms (including hedging costs) will be equal to around 9% (3Y-5Y LIBOR swap is at 0.99%-1.84% + 300bps and hedging cost of 3.5%). This will largely be close to onshore rupee deposit rates (SBI deposit rate is running at 8.75% for 1Y-10Y maturities).
The aim of these measures is to augment dollar flows:
Morgan Stanley said as it has been highlighting, significant currency pressures bring a need to raise NRI dollar deposits through a special scheme under which the government bears part of FX risks. The announcement by the RBI will help in part to augment the NRI dollar deposits. "Currently $15 billion is outstanding under the FCNR deposits, we believe with this measure an additional $5-$10 billion could be raised. Moreover, some additional dollar flows could be raised by banks borrowing overseas, post the announcement," it added.
To improve capital flows and ease the pressure on rupee, the RBI governor has also announced that he will initiate steps to give exporters and importers greater flexibility in their risk management:
(a) exporters will be permitted to rebook cancelled forward exchange contracts up to 50% (from 25% presently) of the value of cancelled contracts
(b) to provide a similar facility for importers up to 25% (from 0% currently).
Amid the current gloom, the new governor has infused a sense of optimism that he is in charge and that the RBI under him will unleash more financial sector reforms, a medium-term positive for the economy, says Nomura. In the near term though, this doesn't take away from the fact that the economy continues to face multiple pressures from a vulnerable external sector and a weak growth outlook. Nomura retains its negative outlook on the economy over the next 3-6 months with an eye on the next policy meeting on 20 September for greater policy clarity. The measures announced by the RBI can help augment capital inflows and cushion the funding pressures to some extent in the near term. Beyond that, according to Morgan Stanley, the indicators to watch to assess funding risks include:
(a) Monthly trade deficit,
(b) CPI inflation
(c) Measures to augment capital inflows and
(d) US 10-year yields and US trade weighted dollar index.