Indian Rupee: RBI pause and Special swap inflows – DBS

The RBI Monetary Policy Committee (MPC) has decided to maintain the benchmark rate at 5.25% in its latest meeting, with a neutral stance and cautious guidance. The central focus remains on core inflation, monitoring risks in West Asia, and the US Federal Reserve's policy outlook. The committee is expected to issue a cautious policy statement highlighting the need for vigilance on the inflation outlook while emphasizing core inflation as a more reliable measure of price pressures.

The RBI has raised a cumulative $40.1 billion under the special swap windows by July 31, which could potentially reach ~$65-70 billion once all compliance matters and tax issues are resolved. This inflow of capital is anticipated to benefit banks, as the cost of these deposits is expected to be lower than that of domestic deposits. However, the impact on foreign exchange reserves and the rupee has not been significant so far.

Despite the inflows, there has been no commensurate response in the foreign exchange market, indicating that other factors might be influencing the currency. Meanwhile, the GBP/USD pair has gained momentum, moving towards 1.3550 during early Asian trading hours, while the US Dollar has softened against the British Pound due to lower-than-expected US inflation data, leading traders to reduce expectations of a US Federal Reserve rate hike.