Indian Rupee: RBI inflow strategy recalibrated – Commerzbank

Commerzbank analysts have outlined how the Reserve Bank of India (RBI) has altered its strategy for managing the Indian Rupee (INR), following strong foreign exchange (FX) inflows and increasing liquidity costs. The RBI's early closure of the FCNR(B) swap window is a response to these factors, eliminating a source of bond demand and rupee liquidity.

The facility, which was originally set to close on 30 September, was closed a month early on 31 August. RBI attributed the early termination to the "encouraging response to the swap facility for FCNR(B) deposits and the resulting FX inflows," generating USD52.3bn.

Despite initial surprise from market participants, the RBI Governor's statement earlier in the week about no proposal to prematurely close the scheme proved inaccurate. Measures to support inflows through overseas foreign currency borrowing (OFCB) and external commercial borrowing (ECB) remain in place until 31 December. The early closure is more indicative of cost-benefit recalibration than a bullish stance on the INR. The decision to close the FCNR(B) facility reduces a source of liquidity and bond demand for the RBI.

The USD/INR exchange rate has risen 0.2% to 95.61 following the RBI's decision, remaining range-bound between 94.70 and 96.70 since early July, with RBI intervention suppressing volatility. Near-term challenges for the INR may include higher precious metal imports, with reports of 400 tonnes of silver import licenses approved.