$32 billion inflows from India's forex drive yet to boost rupee

India’s plan to boost inflows into the country has got off to a strong start, with the central bank Governor Sanjay Malhotra saying banks have garnered $32 billion under the various measures announced.

Even so, the inflows have yet to bolster the central bank’s foreign currency assets or significantly ease rupee liquidity in the banking system. The rupee has also seen more muted gains than during a similar drive to tap diaspora wealth in 2013, the year of the taper tantrum.

Here are four charts to illustrate how the measures are showing up in various market metrics:

Muted Rupee

The rupee’s reaction has been muted compared with 2013, when the currency rallied more than 10% in the first 37 days after the deposit measures were announced.


This time, the rupee rebounded as much as 3% from its record low in May. Those gains have since faded as renewed hostilities in the Middle East pressure the currency. The Reserve Bank of India has sold dollars in recent sessions to support the rupee, according to traders.

The rupee remains sensitive to crude prices, while the deposit push offers only marginal support because it has no direct impact on the foreign exchange, Barclays Bank Plc strategists including Lemon Zhang wrote in a note. They expect the rupee to weaken further and maintain a long Chinese yuan-rupee trade.

Growth in foreign assets of RBI lagging

The RBI’s foreign currency assets have risen by $7.6 billion since the June 5 announcement, as of July 17, trailing the $32 billion raised by the deposit schemes. The gap may be due to a reporting lag. That’s as banks can swap the deposits with the central bank only on their designated day each week, while the RBI updates its foreign assets data every Friday, according to State Bank of India Chief Economic Advisor Soumya Kanti Ghosh.

The RBI could also be extinguishing some of its $28 billion net short forward position in the up-to-three-month bucket, while markets are also considering the possibility that banks are actively hedging the expected coupon payments, according to a Citigroup Inc. note.

Banking cash still tight

Banking system cash remains tight amid the central bank’s dollar sales to support the rupee. The authority has been injecting liquidity into the banking system via repo operations.
“FCNR flows have so far not impacted banking liquidity much, given the continued FX intervention, management of the RBI short forward positions and uptick in currency in circulation,” said Puneet Pal, head - fixed income at PGIM India Mutual Fund.

The liquidity surplus could still rise substantially over the coming months, according to Axis Mutual Fund. Around $40 billion of these inflows will be used to offset the RBI’s short-dollar forward book, with the remainder adding to liquidity, the asset manager said.

Borrowing costs decline

Banks had been resorting to higher-cost short-term borrowing as deposit growth lagged the pace of loan growth. The cost of borrowing for banks has eased since the measures. The rate on one-year CD has fallen to about 7% from more than two-year high of 7.96% in May, according to FBIL data compiled by Bloomberg.