RBI Eyes $80B Inflows: India’s Rupee Measures Boost Forex Reserves

India’s central bank chief, Sanjay Malhotra, anticipates at least $80 billion in foreign-currency inflows stemming from recent measures designed to attract dollars into the country. These inflows have already surpassed expectations, with $56.85 billion accumulated by August 13.

Bolstering Foreign Currency Inflows

The Reserve Bank of India (RBI) implemented these crucial measures in June. Their primary goal is to encourage foreign currency deposits and borrowing, thereby strengthening India’s foreign exchange reserves.

• Expected total foreign-currency inflows: $80 billion
• Accumulated inflows as of August 13: $56.85 billion
• Measures initially announced: June 5
• FCNR swap window closure date: August 31

The Mechanism Behind the Measures

The core mechanism allows local banks to offer more attractive rates on foreign-currency deposits. The central bank plays a vital role by covering the associated hedging costs, making these deposits more appealing to non-resident Indians and overseas entities.

These inflows are primarily channeled through Foreign Currency Non-Resident (Bank) or FCNR(B) deposits and increased overseas borrowing. This strategy provides a direct route for foreign currency to enter the Indian economy.

Rupee’s Response and RBI’s Rationale

Despite these significant efforts, the rupee’s value has shown little change since the measures were announced on June 5. This contrasts with a substantial rally observed in 2013 during similar initiatives.

Governor Malhotra defended the RBI’s decision to close the FCNR swap window a month early, by August 31. He characterized it as a data-driven “calibration” rather than a reversal of policy.

• Diminishing marginal utility of prolonged intervention
• Increasing costs associated with liquidity sterilization

Potential Costs for the Central Bank

The program, while attracting inflows, could prove costly for the central bank. Potential mark-to-market expenses are projected to accumulate over time.

• Estimated mark-to-market expenses in the first year: 300 billion rupees
• Cumulative estimated expenses over five years: 1 trillion rupees

These substantial costs could negatively impact the RBI’s profitability and potentially reduce its dividend payments to the government. Malhotra affirmed that the exchange rate remains market-determined, with the RBI’s intervention policy focused on mitigating excessive volatility and speculative activities, also assisting in managing the central bank’s substantial bearish dollar position.