New Delhi [India], September 19 (ANI): The FCNR(B) deposit scheme could generate a notional profit of around Rs 5 trillion for banks over five years and potentially add about Rs 50,000 crore to the Reserve Bank of India's balance sheet, according to an SBI Research report, which rejected estimates that put the scheme's cost at around Rs 5 trillion.

The report said the USD 127 billion mobilised through the scheme could support additional bank credit and generate interest income that more than offsets the interest paid on the deposits. It argued that the Rs 5 trillion loss estimate counts the same foreign exchange exposure twice.

"The argument that the FCNR(B) scheme entails a total cost of around Rs 5 trillion is fallacious, as it effectively adds two costs arising from the same underlying exchange-rate exposure," the report said.

SBI Research said the estimated loss combines around Rs 1.75 trillion of additional interest costs with about Rs 3.18 trillion of foreign exchange depreciation costs. However, the currency exposure on the deposits has already been hedged through the special USD-INR swap facility, it said.

The deposits, using a conservative and time-lagged credit multiplier of around 2.5, could result in additional credit of about Rs 25 lakh crore, according to the report. At an effective yield of around 7.5 per cent, this could generate notional annual interest income of Rs 1.8 trillion for banks.

Against this, interest outgo at 6.5 per cent on around Rs 12 lakh crore of deposits would be about Rs 75,000 crore, resulting in an estimated net interest margin of around Rs 1 lakh crore annually, or Rs 5 lakh crore over five years, on a notional basis.

The report estimated the cumulative hedging cost at around USD 15 billion, based on an average annual USD-INR hedging cost of 3 per cent and different maturity periods for the USD 127 billion mobilisation.

For the RBI, deploying around USD 100 billion through globally investible avenues at a 4 per cent yield over five years could generate about USD 20 billion, the report said. This would offset the estimated USD 15 billion hedging outgo and result in around USD 5 billion, or Rs 50,000 crore, of additional profitability on current estimates.

The report also said the 5 per cent annual rupee depreciation assumption used in some loss estimates was relatively severe. Under a more moderate 3 per cent depreciation assumption, it estimated the rupee could reach around Rs 110 per US dollar by 2030 from around Rs 95 currently, compared with Rs 120-125 under the 5 per cent assumption.

SBI Research further said the additional liquidity from the scheme could support credit demand as festive-season demand, new loan sanctions and tax and GST outflows absorb liquidity, while banks continue to follow prudent risk management. (ANI)