The Reserve Bank of India (RBI) projects that its recent policy interventions, designed to bolster the Indian rupee, will attract a minimum of $80 billion in foreign currency inflows. RBI Governor Sanjay Malhotra confirmed this expectation in a recent interview, noting that the flows generated by these measures have exceeded initial anticipations from both the central bank and market participants.
Stronger-Than-Expected Inflows
This marks the first official disclosure by the central bank regarding the anticipated scale of inflows from the measures introduced in June. These initiatives notably included allowing Indian banks to offer more attractive rates on Foreign Currency Non-Resident (FCNR-B) deposits, with the RBI covering associated hedging costs.
According to the latest RBI data, FCNR-B deposits alone had mobilized $52.3 billion by August 13. When combined with inflows from overseas foreign-currency debt and external commercial borrowings, the total foreign currency attracted stood at $56.85 billion. This figure aligns with earlier estimates from analysts and bankers, who had predicted the measures could draw approximately $80 billion.
Rupee's Muted Response and RBI's Stance
Despite the substantial influx of dollars, the rupee has shown limited movement from its level on June 5, when the measures were first announced. This contrasts sharply with the significant rally observed in the currency during 2013, when the RBI implemented a similar overseas dollar window.
The muted response has prompted questions about the extent to which additional foreign currency inflows can influence the exchange rate when other market dynamics are at play. Governor Malhotra, however, reiterated that the exchange rate remains market-determined. He emphasized that the RBI's intervention policy is geared towards curbing excessive volatility and speculative activity, rather than targeting a specific exchange-rate level.
Early Closure of Swap Window and Potential Costs
Malhotra also defended the central bank's decision to bring forward the closure of the FCNR swap window to August 31, a month earlier than initially planned. He described the move as a data-driven calibration, not a policy reversal, explaining that the marginal benefit from each additional dollar swapped was diminishing, while the cost due to prolonged liquidity sterilization was increasing. He added that banks were given ample time to adapt to the revised timeline.
The program could incur significant financial costs for the RBI if it expands substantially. Preliminary deliberations suggest potential provisions could reach as much as ₹30,000 crore in the first year and cumulatively up to ₹1 lakh crore over five years. Such costs could impact the RBI's profitability and potentially affect the dividend transferred to the government. The central bank continues to manage its net short forward dollar position through various tools, including earlier liquidity swaps and recent measures, to maintain orderly conditions in the foreign-exchange market.