Strong inflows from a foreign deposit drive prompted the Indian central bank to cut short a zero-cost FX swap facility for banks, with policymakers also wary of the domestic liquidity effects and the cost of such fundraising, analysts said.
The Reserve Bank of India brought forward on Friday the last date for its swap facility by a month after banks collected a more-than-expected $50 billion of deposits from non-resident Indians in about two months.
Analysts said the central bank may have concluded that keeping the window open through September would yield diminishing returns.
The overseas fundraising was part of a raft of measures by Indian authorities to support the rupee, which fell to record lows in May. So far, these have brought in nearly $57 billion, helping shore up foreign exchange reserves to more than $700 billion.
"Given the current pace, overseas FX deposits could reasonably reach around $70bn by end-August. That would be roughly 10% of India’s headline FX reserves and is probably a comfortable enough number for the RBI," said Vivek Rajpal, Asia macro strategist at JB Drax Honore.
A larger stock of overseas deposits adds to India's external liabilities and complicates the management of rupee liquidity as the RBI swaps dollars for rupees.
"Allowing the deposits to accumulate further could have created a challenge three to five years from now when they mature," said Gaura Sen Gupta, chief economist at IDFC First Bank.
BALANCE OF PAYMENTS BOLSTERED
The Iran war, now in its sixth month, had prompted economists to forecast a sharp deterioration in India's external position as oil prices surged, hurting the macroeconomic and financial market outlook for Asia's third-largest economy.
The RBI's measures dramatically altered this.
Many economists, who had projected a balance-of-payments deficit, now expect a surplus for the year ending March.
The early closure of the FX swaps could shrink that surplus somewhat. Economists at Citi have trimmed their BoP surplus forecast to $53 billion from $60 billion earlier, with a deficit in October-December.
An early end for the FX window and the BoP trajectory would likely imply that 95 per dollar becomes a top for the rupee in the near term, they said in a note.
"At the same time, a better reserve position... would ensure that the depreciation bias would also be limited," the economists said.
LIQUIDITY IMPACT, COST CALCULUS
The FX-drawing measures have become an important source of domestic liquidity, with the average banking system surplus climbing to a more than three-month high.
The impact on rupee liquidity may have been a consideration in the central bank's decision to shutter the scheme, Sen Gupta said.
The RBI has been withdrawing liquidity as excess cash in the system can fan inflationary pressures and keep short-term interest rates below the policy rate, blunting monetary policy objectives.
The cost of undertaking the swaps could also have been a reason for the rethink, analysts said.
"With the RBI also bearing forward premium costs, the burden is likely seen as high and an early closure a prudent step," analysts at Nomura said in a note.
