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

FCNR inflows have bolstered India's foreign exchange reserves by approximately $100 billion, providing support to both the rupee and balance of payments (BoP), according to a recent 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 weak.

While FCNR deposits have stabilized the Indian rupee and BoP for now, their support may not be enduring. The report highlights that FCNR inflows have helped stabilize the capital account, and the rupee has benefited from this increased stability. Moreover, systemic liquidity has expanded from around 1 percent to 3 percent of net demand and time liabilities (NDTL) in September due to these inflows.

However, the report warns that the boost to credit growth from improved liquidity may be limited, as bank credit growth is already at approximately 19 percent over the past two months, with an adverse base effect expected from October. Additionally, the report points out a widening gap in India's external trade position, with services exports and NRI remittances providing support to the current account, but the goods trade balance deteriorating significantly, reaching a decade-high of around 9 percent of GDP.

With nominal GDP growth near decade lows, Nuvama emphasizes that a meaningful return of FII flows is crucial for maintaining external stability as the support from FCNR inflows may be absorbed over time.