Mumbai: India’s rupee strengthened to a two month high against the US dollar on Thursday after the country mobilised more than $136 billion through special foreign currency measures, giving the Reserve Bank of India greater room to manage pressure on the currency.
The rupee opened at 94.30 to the US dollar and later reached 94.26 in early trading, its strongest level since late June. The currency has gained more than 1 percent this week, making it one of the better performing currencies in Asia.
The move came after the Reserve Bank of India reported that foreign currency mobilisation through its special dollar rupee swap facility had reached $136.377 billion by August 31. The figures are provisional and remain subject to final reporting, accounting and reconciliation.
Foreign Currency Non Resident Bank, or FCNR(B), deposits accounted for the largest share of the mobilisation, at $127.226 billion. A further $5.260 billion came through overseas foreign currency borrowings, while $3.891 billion came through external commercial borrowings.
The scale of the inflows is significant because it gives the central bank greater room to manage movements in the rupee and respond to external financial pressures.
The Reserve Bank of India introduced the special dollar rupee foreign exchange swap facility on June 8. The FCNR(B) deposit window was initially scheduled to remain open until September 30, but the central bank brought the closing date forward to August 31 after receiving a strong response.
The facility for external commercial borrowings and overseas foreign currency borrowings will remain open until December 31.
The latest mobilisation does not mean that all of the $136 billion has already been added to India’s foreign exchange reserves. India’s reserves had reached a record $729.33 billion in the week ended August 21. The new inflows are expected to strengthen the country’s external liquidity position, but the two figures cover different periods and should not be treated as a single reserve total.
The Reserve Bank of India has also been selling dollars in the market to help manage movements in the rupee. Strong foreign currency inflows and central bank intervention have helped offset some of the pressure from higher oil prices and rising global yields.
The rupee’s recent strength comes despite several factors that could put pressure on the currency.
Brent crude has risen sharply this week amid renewed tensions between the United States and Iran. Oil prices were around $95.48 a barrel in early trading on Thursday. Higher oil prices are important for India because the country imports large amounts of crude, increasing the cost of imports when prices rise.
Expectations that the US Federal Reserve could raise interest rates this month have also pushed US bond yields higher and kept the dollar broadly supported. These developments can create pressure on currencies in emerging markets such as India.
The large foreign currency mobilisation therefore gives the Reserve Bank of India additional room to respond to such pressures.
However, much of the foreign currency raised through the programme will eventually have to be repaid. This means the immediate improvement in foreign currency liquidity also comes with future obligations for the financial system.
The large inflows can also increase rupee liquidity in the domestic banking system when foreign currency is exchanged through the central bank. Managing that additional liquidity will remain an important task for monetary authorities.
The scale of the latest mobilisation is particularly notable compared with India’s previous major FCNR(B) deposit drive in 2013, which raised about $26 billion through deposits.
For now, the large inflows have strengthened India’s foreign currency position and helped the rupee recover. They have also given the Reserve Bank of India greater flexibility to manage volatility in the currency market.
The outlook for the rupee will continue to depend on several factors, including global oil prices, US interest rates, movements in the dollar, geopolitical tensions and the central bank’s intervention in the foreign exchange market.