Rupee Range Holds Firm Despite Inflows

Despite strong FCNR (B) swap inflows and higher FX reserves, the Indian Rupee has not experienced significant gains against the US Dollar. According to DBS economist Radhika Rao, the spot-neutral nature of inflows under the swap windows, increased hedging-related demand, and authorities' preference to mop-up inflows have constrained the room for sharp gains in the rupee.

Over the past week, onshore markets were driven by three key developments: markets pricing in a more hawkish RBI following the MPC minutes, a surge in inflows through the swap windows, and the upward move in global yields. Ahead of a looming end-month deadline for FCNR (B) deposits, banks have raised a cumulative $72.8bn via the special swap schemes by 21-Aug, up a sharp ~$20bn since mid-Aug.

Nearly 90% of these funds i.e. $65.4bn were via the deposit program. The impact of these inflows would typically be evident in FX reserves, currency, liquidity and deposit growth. However, in this case, the rupee has remained capped in a tight corridor between 95.50 and 96.00 against the US Dollar.

While inflows are catching steam, other pressure points remain, by way of average monthly goods deficit maintaining a sizeable beat of -$30bn in the last three months, larger than $17bn surplus by services.