We don’t believe that the cost of swap could have been a constraining factor. Our estimates show that the cumulative cost would amount to around 15% of the corpus, or $10.5 billion. While this appears sizeable in absolute terms, it needs to be viewed against the scale of India’s foreign-exchange reserves rather than the FCNR(B) corpus alone. With current reserves at around $700 billion and incremental reserve accumulation assumed at roughly $20 billion annually, the five-year cumulative hedging cost of $10.5 billion would amount to only 1.45% of the current reserve stock and around 1.27% of the projected reserve stock. This is minimal.

 We believe that the impact on rupee post the announcement of FCNR(B) measures has been surprisingly minimal. In 2013, Rupee was at 65.70 on 31 Aug’2013 and appreciated to Rs 62.45 on 29 Nov 2013 (4.9% appreciation). Post the closure of FCNR(B) scheme, rupee settled at 59.89 (8.8% appreciation from Aug 2013). In contrast, rupee appreciation currently has been only 0.1% from the opening levels when the FCNR(B) scheme started. It is important that while the magnitude of appre ciation may differ from 2013 given the substantially different global and domestic macroeconomic environment, the direction of the impact must remain supportive for the rupee. The RBI should look into activist and surprise intervention strategies to ensure that somehow the market bias that exchange rate has only a depreciating bias right now must be corrected. 

An exchange rate appreciation bias is important given the likely global market upheavals. There are 3 clear signals of such. Firstly, Long-term US Treasury yields is under significant pressure following the July FOMC meeting, with 30-year Treasury yield rising to nearly 5.3%, its highest level since 2007, amid heightened concerns over US fiscal outlook with no attempt by US Government to embark on a path of fiscal consolidation. The jump in US yields is really disconcerting as US inflation numbers have continued to surprise on downside. 

Secondly, the U.S. Treasury’s decision to sell Euros from its reserves and buy yen was an unusual step to support Japan’s cur rency, after the yen weakened to around ¥164 per dollar, its lowest level in four decades. The intervention pushed the yen up sharply to around ¥156 per dollar, although it later weakened back towards ¥159. It may be noted that during 1998 Asian Fi nancial crisis, The Yen had also collapsed and this resulted in the Federal Reserve selling a reported $ 2 bn dollars to halt the slide of the Yen. The key question is that Japan is also the largest foreign holder of US Treasuries, with more than $1 trillion. If Japan had to sell some of these assets to raise dollars for further yen intervention, it could have pushed treasury prices down and US yields higher. 

Thirdly, Brent crude could rise towards $100 per barrel with geopolitical tensions remaining elevated and disruptions around the Strait of Hormuz posing risks to global oil supplies, the upside risks to crude prices remain significant. Our estimates sug gest that Brent crude could move beyond $100 per barrel for a while putting pressure on rupee.