Robust FCNR(B) inflows: Rupee opens 67 paise stronger at 94.30 per USD

The Indian rupee strengthened by 67 paise, reaching 94.30 per US Dollar, following a massive $127.226 billion inflow into Foreign Currency Non-Resident (Bank) deposits under the RBI’s concessional swap facility from June 8 to August 31. This robust flow exceeded expectations, with $137 billion mobilised, prompting the RBI to close the facility early.

Madhavi Arora, Chief Economist, Emkay Global Financial Services, noted that the higher-than-anticipated foreign currency inflows likely contributed to the rupee's appreciation.

The stronger rupee surged to a high of 94.4350 and a low of 94.26 intraday, testing new levels. With the liquidity impact potentially surpassing ₹10 lakh crore in September, Arora suggested that the banking system may deploy various liquidity-absorption tools, such as FX swap sell-buy agreements, Micro-Securities System (MSS), or even ICRR swaps, though the latter seems less likely. Additionally, the bank could take delivery of their $32 billion forward book due to mature in one year, alleviating some liquidity pressure.

However, Arora highlighted the indirect fiscal cost associated with these inflows, estimating it could amount to Rs 1 lakh crore cumulatively. She emphasized the need for judicious and productive deployment of these funds to mitigate these costs. Sachin Sachdeva, Vice-President & Co-group Head, Financial Sector Ratings, ICRA, agreed that the strong response from overseas depositors led to significant FCNR(B) inflows, bolstering banking liquidity buffers.

However, he cautioned that deploying these funds profitably might take time and could intensify competition for quality borrowers, potentially leading to lower loan yields and modest margin moderation in the short term.