USD/INR: Volatility curbed as RBI eyes dollar inflows – DBS

FXStreet Insights Team FXStreet

DBS Group Research economist Radhika Rao notes that the Reserve Bank of India (RBI) is exploring measures to attract more US Dollar (USD) flows to support the Rupee and address the balance of payments gap. These may include foreign currency bond issuance by state-owned banks with swap arrangements, but a sustained INR recovery is seen as unlikely without a material improvement in capital flows.

Rupee support from flows and measures

"India’s central bank is, reportedly, studying measures to draw in more dollar flows to curb rupee weakness and plug the balance of payments gap."

"This includes a plan for state-owned banks to sell foreign currency bonds, reviving a measure that was utilized nearly three decades ago."

"At this juncture, any foreign currency bond might also be accompanied by swaps for participating lenders to hedge currency risks, in turn helping to improve returns for investors."

"These swap arrangements will need to factor in higher prevailing US rates vs past cycles (including 2013 taper tantrum), which in turn implies higher subsidy support from the RBI."

"The rupee is likely to enjoy a temporary reprieve on global and local cues though a protracted rally is unlikely until the flows outlook improves materially."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

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