Inflows of $49 billion in 2 months, but no 2013-like boost for rupee, Pg13

Key Highlights:

• India received $49 billion in foreign currency inflows during June and July, primarily through Foreign Currency Non-Resident (Bank) deposits (FCNR(B) deposits) and foreign loans.
• Despite these significant inflows, the Indian Rupee strengthened by only 0.4% against the US Dollar, closing at 95.38 per dollar on Tuesday.
• This contrasts sharply with 2013, when a similar FCNR(B) swap window led to a nearly 10% appreciation of the rupee.
• The limited impact is partly due to the mechanism of FCNR(B) deposits, where dollars go directly to the Reserve Bank of India (RBI) rather than the open market.
• External factors like the re-escalation of the West Asia conflict, rising oil prices, and a stronger dollar also countered the rupee's potential appreciation.

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Detailed Insights:

• The FCNR(B) swap window allows banks to receive dollar deposits and exchange them directly with the RBI for rupees, preventing these dollars from entering the open market.
• Between June 8 and July 17, Indian banks raised $17 billion in FCNR(B) deposits, but the RBI's Foreign Currency Assets (FCA) rose by only about $7 billion due to operational delays.
• The RBI actively intervened in the spot market by selling dollars to counter rupee depreciation caused by global tensions.
• The central bank also engaged in the forward market, selling $103 billion on a net basis by the end of June, which would absorb some of the new inflows.
• Banks are hedging their interest payment-related exchange rate risks for FCNR(B) deposits, increasing future demand for dollars and putting pressure on the rupee.
• Non-Resident Indians (NRIs) are expected to pour in as much as $75 billion through FCNR(B) deposits by September 30, when the current window ends.
• The rupee's trajectory is expected to remain stable around 96 per dollar by 2026-27, influenced by a balance of improved near-term external outlook and structural headwinds.

Key Concepts Involved:

• Foreign Currency Non-Resident (Bank) Deposits (FCNR(B) Deposits): Term deposit accounts maintained by Non-Resident Indians (NRIs) in foreign currency with banks in India.
• Reserve Bank of India (RBI): India's central bank, responsible for monetary policy, currency issuance, and foreign exchange management.
• Foreign Currency Assets (FCA): The foreign currency component of a country's foreign exchange reserves, held by the central bank.
• Spot Market Intervention: A central bank's action of buying or selling foreign currency in the immediate delivery market to influence the exchange rate.
• Forward Market Intervention: A central bank's strategy of entering into contracts to buy or sell foreign currency at a future date to influence future exchange rate expectations.