RBI’s Forex Swap War Chest Gives Rupee A Stronger Shield

New Delhi: The Reserve Bank of India’s special swap facilities have mobilised $136.3 billion by the end of August, significantly exceeding market expectations and potentially lifting India’s forex reserves beyond the $750-billion mark, according to a DBS Bank report.

The sizeable inflows have strengthened the RBI’s ability to manage volatility in the Indian rupee, which recently recovered sharply against the US dollar.

FCNR(B) Deposits Drive Inflows

Around 92% of the mobilisation came through FCNR(B) deposits, which contributed nearly $126 billion. The remaining amount was raised through offshore borrowing facilities.

The report said the impact is already visible in the currency market, with USD-INR slipping below the 95 level and moving towards the mid-94 range amid dollar sales and broader weakness in the US currency.

“Given the swap arrangement, these inflows will add to an already abundant INR liquidity backdrop, which was at a four year high this month, depressing overnight rates,” said Radhika Rao, Senior Economist and Executive Director, DBS Bank.

Rupee Gets Stronger Defence

DBS said factors including tax-related outflows, seasonal currency demand, portfolio outflows and the maturity of forward positions could partly offset the liquidity surge.

The report added that part of the existing forex reserves could be set aside against future deposit and debt maturities, reducing the risk of a sudden spike in dollar demand.

Currency market participants expect the rupee to trade between Rs 94.10 and Rs 95.50 against the dollar. A decisive break below Rs 94.10 could potentially take the domestic currency towards Rs 93.50.

Asian currency strength and a softer dollar index are also supporting the rupee.