RBI expects at least $80 bn in dollar inflows from measures to support Rupee: Report

The Reserve Bank of India expects its recent measures to attract foreign-currency funds to generate at least $80 billion in inflows, RBI Governor Sanjay Malhotra said in an interview with The Financial Express. The central bank has already seen stronger-than-expected flows, even as the rupee has shown limited movement since the measures were announced in June.

Malhotra said the flows generated by the measures have been stronger than both the RBI and most market participants had anticipated. This marks the first time the central bank has publicly disclosed the scale of inflows it expects from the measures introduced to support the rupee.

The initiatives included allowing Indian banks to offer more attractive rates on Foreign Currency Non-Resident (FCNR-B) deposits, with the RBI subsidising associated hedging costs.

According to the latest RBI data, FCNR-B deposits had mobilised $52.3 billion as of August 13. When combined with inflows through overseas foreign-currency debt and external commercial borrowings, the total stood at $56.85 billion.

Analysts and bankers had previously estimated that the measures could attract around $80 billion.

Rupee response remains limited

Despite the substantial inflows, the rupee has barely moved from its level on June 5, when the measures were announced. That contrasts with the sharp rally seen in the currency in 2013, when the RBI last introduced a similar overseas dollar window.

The muted response has raised questions about how much additional foreign-currency inflows can influence the exchange rate when other market forces remain at play.

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Malhotra, however, stressed that the exchange rate continues to be market determined. He said the RBI's intervention policy remains focused on curbing excessive volatility and undue speculative activity rather than targeting a particular exchange-rate level.

RBI defends early closure of swap window

The governor also defended the RBI's decision last week to bring forward the closure of the FCNR swap window by a month to August 31.

Malhotra described the move as a data-driven calibration rather than a reversal of policy. He said the marginal benefit from each additional dollar swapped was diminishing, while the cost was increasing because the resulting liquidity would need to be sterilised for longer.

He added that the timing of the announcement provided banks with sufficient time to make the necessary arrangements.

Potential cost for RBI

The programme could also create a financial burden for the central bank if it expands substantially. The RBI currently does not recognise mark-to-market costs associated with subsidising banks' hedging expenses.

According to a person familiar with preliminary deliberations, potential provisions could amount to as much as ₹30,000 crore in the first year and potentially reach ₹1 lakh crore cumulatively over five years.

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Such costs could weigh on the RBI's profitability and potentially affect the dividend transferred to the government.

Meanwhile, the central bank faces the challenge of managing its net short forward dollar position without destabilising the currency market. Malhotra pointed to earlier liquidity swaps and recent measures as tools that can help manage that position while maintaining orderly conditions in the foreign-exchange market.