Dollar inflows strengthen forex buffers but leave rupee largely unchanged
Key Highlights
- RBI’s special dollar-rupee swap facility attracted $72.85 billion by August 21.
- FCNR(B) deposits contributed about $65.4 billion, nearly 90 per cent of total inflows.
- OFCBs added $4.86 billion, while ECBs contributed $2.59 billion.
- The rupee was at ₹95.71 per dollar both on June 8 and August 21.
- India’s forex reserves rose to $716.91 billion in the week ended August 14.
- Reserves have increased by nearly $50 billion since late June.
- Foreign currency assets rose for seven straight weeks.
- The inflows have largely been absorbed into RBI reserves rather than entering the spot market.
- The FCNR(B) swap window will close on August 31.
- ECB and OFCB swap windows will remain open until the end of December.
Strong foreign-currency inflows mobilised through the Reserve Bank of India’s concessional swap schemes have sharply strengthened India’s foreign-exchange reserves, but have done little to support the rupee because most of the dollars have been absorbed by the central bank rather than released into the spot market.
The RBI’s special dollar-rupee swap facility attracted $72.85 billion by August 21. FCNR(B) deposits accounted for $65.40 billion, or nearly 90 per cent of the total, while offshore foreign currency bonds contributed $4.86 billion and external commercial borrowings added $2.59 billion.
Rupee Sees Little Benefit
Despite the size of the inflows, the rupee has remained broadly unchanged. It was at ₹95.71 against the dollar when the scheme was launched on June 8 and closed at the same level on August 21.
Market participants say the difference from the concessional swap programme introduced in 2013 is that the dollars raised this time have largely remained with the RBI. Under the current mechanism, banks raising FCNR(B) deposits swap the foreign currency with the central bank for rupees. This adds liquidity to the banking system, while the dollars become part of RBI’s foreign-currency assets.
Unless the RBI subsequently supplies those dollars through spot intervention or adjusts its forward positions, the inflows do not directly increase dollar availability in the currency market.
Reserves Rise Sharply
The impact has instead been visible in India’s reserve position. Forex reserves rose by $9.9 billion to $716.91 billion in the week ended August 14, taking the cumulative increase since late June to nearly $50 billion.
Foreign currency assets have risen for seven consecutive weeks, increasing by almost $41 billion from $541 billion in the week ended June 26.
The RBI has said reserves remain comfortable, with import cover of more than 10 months and external debt cover of 90.8 per cent as of July 31, when total reserves stood at $692.9 billion.
Swap Windows Near Deadlines
The FCNR(B) swap window will close on August 31, one month earlier than previously planned. The windows for ECBs and OFCBs will continue until December-end.
For the rupee, however, market direction will continue to depend more heavily on global dollar movements, crude oil prices, capital flows and the extent of RBI intervention than on the headline size of swap inflows alone.
