RBI's inflow push gets off to strong start, fortifying India's balance of payments

MUMBAI: A wave of foreign currency inflows drawn by rupee-support measures the central bank introduced just over a month ago is adding to confidence in India’s balance of payments position at a time of heightened oil-price volatility.

In its first update since the scheme was launched in early June, the Reserve Bank of India said the measures had mobilized $20.72 billion through July 17, with foreign currency non-resident deposits accounting for about $17.5 billion of the total.

The data is likely to allay concerns that the measures were seeing a sluggish response and might struggle to attract the level of inflows anticipated, economists said.

“The amount raised under the FCNR(B) deposit scheme is significantly above what news reports suggested and belies the prevailing narrative that banks were struggling to raise deposits, amid higher US rates and other bottlenecks,” analysts at Nomura said in a note.

The current programme has attracted funds at a much faster pace than a similar RBI scheme in 2013. Roughly $10 billion was mobilised in the first seven weeks of the 2013 programme, according to BofA.

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Economists added that the robust initial response bodes well, as such programmes typically see inflows skewed toward the later stages of the window.

If current trends are extrapolated using the fund mobilisation pattern seen in 2013, India could be on course to attract around $80 billion under the scheme, according to BofA.

BoP, rupee boost

The strong early response to the RBI’s measures is adding to confidence that India’s balance of payments position will remain in surplus in the current fiscal year, despite risks from volatile crude oil prices, economists said.

“Our balance-of-payments estimate is currently tracking a surplus of around $25 billion, with upside risks if FCNR inflows strengthen further,” Gaura Sen Gupta, chief economist at IDFC First Bank, said, while noting that her BoP forecast was based on Brent crude averaging $75-$80 a barrel, whereas prices have recently climbed near to $90.

“These inflows give the RBI more firepower to keep depreciation pressures on the rupee in check,” she added.

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A stronger balance of payments position may influence the central bank’s currency intervention strategy and use of FX reserves as the rupee returns to trading near record low levels against the dollar.

The current RBI leadership believes foreign exchange reserves should be conserved, viewing reserve adequacy more conservatively than headline figures suggest, a source familiar with central bank discussions told Reuters.