INDIA: FCNR Inflows Deliver Modest FX Support, Bigger Sterilisation Challenge
Monday's RBI data showed total facility receipts reaching $143.6bn, dominated by $132.98bn of high-yielding FCNR(B) dollar deposits - substantially above the RBI's initial guidance of $80-90bn. Despite the scale of these inflows, their impact on the INR has so far been relatively modest. Yet they have still created a sizeable liquidity-management challenge for the RBI as the conversion of these dollars into rupees has materially expanded domestic liquidity. * INR has strengthened since mid-September, but its gains have been relatively contained in the context of the >10% decline in crude prices from the September highs. Intraday pressures also persist, with reports today pointing to further RBI intervention to prevent further spot losses. * The liquidity impact has nevertheless been substantial. Banking-system liquidity rose to a record INR 11.16tn on Sept 6, with Reuters reporting that state-run banks have since been conducting long-tenor dollar/rupee sell-buy swaps on the RBI's behalf, bringing liquidity down to a four-week low of INR 4.44tn. * The facility has therefore provided only modest FX support while leaving the RBI with a sizeable sterilisation task. With Bloomberg repor
98bn of high-yielding FCNR(B) dollar deposits - substantially above the RBI's initial guidance of $80-90bn. Despite the scale of these inflows, their impact on the INR has so far been relatively modest. Yet they have still created a sizeable liquidity-management challenge for the RBI as the conversion of these dollars into rupees has materially expanded domestic liquidity. * INR has strengthened since mid-September, but its gains have been relatively contained in the context of the >10% decline in crude prices from the September highs.
Intraday pressures also persist, with reports today pointing to further RBI intervention to prevent further spot losses. * The liquidity impact has nevertheless been substantial. 44tn. * The facility has therefore provided only modest FX support while leaving the RBI with a sizeable sterilisation task.
With Bloomberg reporting that the RBI and Finance Ministry will meet today to set the H2 borrowing calendar, the extent to which excess liquidity is absorbed through FX swaps versus outright bond sales will matter for the supply backdrop in IGBs. Yields across the curve are up as much as 2bps today, while the 10-year yield hit its highest level since May last week.