FCNR inflows cushion rupee, BoP; FII flows crucial for sustained external stability: Report

New Delhi, India: Foreign currency non-resident (FCNR) inflows have bolstered India's foreign exchange reserves by around USD 100 billion, providing much-needed support to the rupee and balance of payments (BoP), according to a report by Nuvama Research. However, the report suggests that sustained external stability will ultimately hinge on the return of foreign institutional investor (FII) flows, which have been lacking.

The report acknowledges that FCNR deposits have stabilized the rupee and BoP in the short term, but caution that this support may not suffice over the long run. It emphasizes that, while FCNR inflows have bolstered the capital account, the absence of robust FII flows is a concern. The stabilization of the rupee and BoP can be attributed to the rise in FCNR deposits.

Additionally, the report highlights the broader impact of FCNR inflows on domestic liquidity, with systemic liquidity rising from 1% to 3% of net demand and time liabilities (NDTL) in September. Nonetheless, the report notes that the boost to credit growth from increased liquidity may be limited, given that bank credit growth has already reached approximately 19% over the past two months and an adverse base effect is anticipated in October.

Moreover, the report points out an emerging gap in India's external trade position. Although services exports and remittances from Non-Resident Indians (NRIs) continue to support the current account, they are increasingly masking a worsening goods trade balance. India's goods deficit has reached a decade-high, accounting for around 9% of GDP, even as nominal GDP growth remains near decade lows.

In light of these developments, Nuvama emphasizes the importance of a sustained return of FII flows for maintaining external stability. As the support from FCNR inflows is gradually absorbed over time, a robust resurgence of FII inflows will be crucial to ensure the resilience of India's external economy.