$127 Billion NRI Deposits Give RBI More Firepower to Support Rupee

A surge in deposits from non-resident Indians (NRIs) has strengthened the Reserve Bank of India’s foreign-exchange position and could provide the central bank with greater room to support the rupee, according to a Reuters report.

The special foreign-currency deposit programme has attracted about $127.23 billion, creating a substantial pool of foreign exchange that has added to the country’s financial buffers. The inflows come at a time when the rupee has faced pressure from global market conditions, including elevated crude oil prices and movements in US Treasury yields.

The increase in foreign-currency deposits gives the RBI greater capacity to intervene in the foreign-exchange market if necessary. Stronger reserves can allow the central bank to manage excessive volatility and provide support to the domestic currency during periods of heightened pressure. The Indian currency closed at 94.4850 against the US dollar on September 3, marking its strongest closing level in roughly 10 weeks.

However, the sizeable inflows have also created a challenge for the domestic banking system. The conversion of foreign currency into rupees can add to liquidity in the banking sector, leaving banks with excess funds. The RBI may therefore need to take steps to absorb some of this surplus liquidity to prevent it from creating instability in financial markets.

Among the measures available to the central bank are foreign-exchange swaps, reverse-repurchase operations and government bond sales. Adjustments to the cash reserve ratio could also be considered if authorities determine that additional liquidity management is necessary.

The scale of the NRI deposits is significant because it provides the RBI with additional resources at a time when external economic pressures remain elevated. At the same time, policymakers will have to balance currency management with the need to keep domestic liquidity conditions stable. The combination of stronger foreign-exchange resources and careful liquidity management could nevertheless give the RBI greater flexibility in dealing with currency-market volatility in the coming months.