Indian Rupee: Range holds against US Dollar as inflows offset trade drag – DBS

DBS economist Radhika Rao observes that strong FCNR (B) swap inflows and higher FX reserves have not translated into significant Rupee gains, with USD/INR staying in a tight 95.50–96.00 range. She attributes this to spot-neutral swap flows, hedging demand and official intervention, while noting improving portfolio flows but persistent pressure from a large goods trade deficit.

Rupee capped in tight corridor

"Onshore markets were driven by three key developments over the past week: markets pricing in a more hawkish RBI following the MPC minutes, a surge in inflows through the swap windows, and the upward move in global yields"

"Ahead of a looming end-month deadline for FCNR (B) deposits, banks have raised a cumulative $72.8bn via the special swap schemes by 21-Aug, up a sharp ~$20bn since mid-Aug. Nearly 90% of these funds i.e. $65.4bn were via the deposit program. Sharp jump here could lead to total FCNR funds top $70-75bn, taking the total to above $80-90bn."

"Notably, the pace of fund raising accelerated in the past month, with the last $16bn added in nearly a week, vs earlier the same scale over a fortnight. Impact of these inflows would typically be evident in FX reserves, currency, liquidity and deposit growth."

"In August, equities witnessed net inflows worth $2.3bn, while funds into debt are nearly flat. In FY27 YTD, foreign interest in equities remains in red but nearly offset by ~$7.3bn into the debt markets."

"While inflows are catching steam, other pressure points remain, by way of average monthly goods deficit maintaining a sizeable beat of -$30bn in the last three months, larger than $17bn surplus by services."

"The spot-neutral nature of inflows under the swap windows, increased hedging-related demand, and authorities’ preference to mop-up inflows to gradually lower their exposure in the forwards book, have constrained the room for sharp gains in the rupee."

"An inability to gain momentum despite a softer USD index led the USD/INR to be confined within 95.50-96.00 range, with intervention risks preventing a break above. Concurrently, portfolio flows have picked up, while trade remains a drag."