New Delhi draws in $73 billion in 11 weeks, powered by special deposits for non-resident Indians
India has attracted inflows of $73 billion in 11 weeks, driven mostly by foreign currency bank deposits made by non-resident Indians.
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The U.S. dollar was on the defensive early on Wednesday after comments from Federal Reserve Chair Jerome Powell bolstered wagers on an interest rate cut this month.
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New Delhi's bid to attract foreign funds through a special scheme has helped power $73 billion in inflows in the last 11 weeks, driven by the incentives offered to non-resident Indians for making foreign currency deposits in Indian banks.
The move was aimed at shoring up the Indian rupee that continues to stay weak, amid a rising energy import bill and exodus of foreign capital.
Despite the recent spike in energy prices, the rupee has been relatively stable as these inflows have provided headroom to the Reserve Bank of India to perform currency intervention, Gaura Sengupta, chief economist at India's IDFC First Bank, told CNBC.
The RBI is using these inflows to minimize the "volatility" but not to "influence the direction" of the local currency, she said, adding that her firm pegs the rupee to settle at around 96.50 per dollar by March 2027. It was trading at 95.7 on Tuesday.
The country's finance ministry has called the incentivized deposit scheme, also known as Foreign Currency Non-Resident (Bank) deposits, India's "largest and fastest foreign-currency mobilization exercises."
More than $65 billion of the inflows came to these bank deposits, India's finance ministry said Monday, and the deposits could rise to nearly $80 billion before the incentives end on Aug. 31, according to global brokerage Nomura.
In 2013, a similar move had led to inflows of $26 billion over the span of three months, as per the official release. These inflows have "fortified" India's external buffers with "maximum cost-efficiency," the ministry said.
Rupee performance this year
In June, India's central bank started offering special incentives on foreign currency bank deposits of non-resident Indians, on overseas foreign currency borrowings, and on external commercial borrowings. Jefferies in a report on Monday said these inflows had exceeded their expectations and, put together, could raise up to $100 billion by the end of this month.
India has been battling foreign capital outflows at a time when its trade deficit has been widening due to high global energy prices. In March, foreign investors sold a record $12.7 billion of Indian equities. As of August, foreign investors have sold $24.5 billion in direct equity so far this year, higher than the $18.9 billion sold last year.
Meanwhile, the country's trade deficit has widened to $49.3 billion between April and July this year from $32.3 billion a year ago. During this time, India's energy imports, which account for more than a quarter of its purchases, rose nearly 22%, as per data from the trade ministry.
As a result, the local currency has been under pressure and is among the worst-performing Asian currencies against the dollar, data from LSEG showed. Since the start of the year, the rupee has weakened by 6.5% against the dollar.
Global brokerage Citi expects India to report a balance of payments surplus of $53 billion for the financial year ending March 2027, lower than the $60 billion reported a year ago.
It cautioned that beyond August, once the incentivized deposit scheme closes, the trajectory of the balance of payments will be dependent upon oil prices and foreign direct investment and foreign portfolio investment inflows.
