22 hrs ago
Dollar inflows strengthen rupee but challenge RBI liquidity management
India has attracted a very large amount of dollars through special bank deposits.
This has helped the rupee become stronger against the dollar.
The Reserve Bank of India has also gained more foreign-exchange reserves and is intervening more regularly to support the currency.
However, the dollars are adding a lot of money to Indian banks and financial markets.
This extra money can make it cheaper for some banks to raise funds.
If too much money stays in the system for too long, it could increase inflation.
The RBI is using auctions to remove some of the extra money, but banks did not deposit as much as the RBI wanted.
Overall, the inflows may improve India’s external finances, although high oil and gold imports could keep the trade gap large.
Special FCNR (B) and other schemes are expected to attract over $100 billion.
The rupee has strengthened from nearly 97 per dollar in late May to 94.95.
India’s foreign-exchange reserves reached $729.33 billion in the week to August 21.
System liquidity averaged Rs 3.57 lakh crore in August, up from Rs 1.07 lakh crore in July.
The Balance of Payments is estimated to record a $65-70 billion surplus in FY27.
- Who
- The Reserve Bank of India, Indian banks, and depositors participating in FCNR (B) schemes.
- What
- Large dollar inflows are strengthening the rupee, increasing reserves and liquidity, and potentially improving India’s Balance of Payments.
- Where
- Across India’s foreign-exchange, banking, money-market, and external-finance systems.
- When
- The effects described followed the launch of the special schemes and include data for August, FY27, and the week to August 21.
- Why
- The schemes were introduced partly to counter the rupee’s sharp decline amid a strong dollar, elevated crude prices, and geopolitical hostilities in West Asia.
Benefits of Dollar Inflows
Risks and Policy Challenges
Rupee and external stability
Benefits of Dollar Inflows
The inflows have helped strengthen the rupee, raise reserves, and could give India a larger buffer against external shocks.
Risks and Policy Challenges
The rupee has not appreciated as much as it did after similar schemes in 2013, while geopolitical risks and weaker capital flows continue.
Banking liquidity
Benefits of Dollar Inflows
FCNR (B) deposits provide stable medium-term funding, lower funding costs, and help smaller banks raise funds at lower rates.
Risks and Policy Challenges
The resulting liquidity glut could create inflationary pressure and may eventually require measures such as a higher cash reserve ratio.
RBI intervention
Benefits of Dollar Inflows
Regular foreign-exchange intervention can help contain rupee volatility and support the currency.
Risks and Policy Challenges
The RBI’s net short forward position has increased, showing greater reliance on derivatives to manage currency volatility.
Key facts
- Expected inflows
- More than $100 billion, including roughly $100 billion through the special FCNR (B) scheme alone.
- Rupee level
- The rupee ended Tuesday’s session at 94.95 per dollar, after nearing 97 in late May.
- Foreign-exchange reserves
- Reserves reached $729.33 billion in the week to August 21.
- System liquidity
- Liquidity averaged Rs 3.57 lakh crore in August, compared with Rs 1.07 lakh crore in July.
- FCNR (B) pricing
- A three-year deposit was priced around 6.5%, compared with domestic term deposits at about 7.45%.
- Capital-account surplus
- The capital-account surplus is estimated to exceed $110 billion in the current year.
- FY27 Balance of Payments
- The Balance of Payments is expected to show a surplus of $65-70 billion.
Sources
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