India has reportedly attracted more than $136 billion in foreign currency funding. While this gives much support to the rupee, it also comes with its own risks. As most of the funds came from FCNR deposits, they cannot be considered permanent gains for the country. With the huge inflow adding a large amount of rupee liquidity to the banking system, the RBI could face fresh challenges, potentially impacting INR and Bitcoin.
Significantly, this inflow has strengthened India’s external position, with the forex reserves hitting a record level of $729.33 billion. But the main issue arises when it is understood that the $136 billion could not be viewed as the country’s permanent earnings. Banks will have to eventually repay much of the amount as the FCNR(B) deposits usually have a 3–5-year tenure.
Notably, FCNR(B) deposits are those foreign-currency deposits held by non-resident Indians, and thus, they have to be repaid by the banks later. As a majority of the $136 billion could be traced to FCNR(B) deposits, the inflows create an obligation for the future despite the current benefits.
It is important to mention that banks were willing to offer high leverage as the FCNR(B) deposits served as collateral. The scheme helped some banks to offer loans of up to nine times the value of eligible dollar deposits. Thus, non-resident Indians became more interested in the scheme. It also allowed banks to generate more lending business from the incoming foreign money.
These inflows result in a major increase in rupee liquidity. As banks receive dollars and convert them into rupees, more cash enters the financial system. As per the latest data, this liquidity reached around ₹9.7 lakh crore, putting the RBI under pressure. If liquidity surges, it could push the short-term interest rates lower, making it difficult for the RBI to manage the monetary conditions.
Currently, the rupee is moving around ₹94.44 per dollar as the RBI continues to support the currency through dollar sales. But if the rupee weakens again and moves above ₹100 per dollar, the recent foreign currency cushion could become more important. A weaker rupee could make dollar-based liabilities more expensive in INR. It could also raise the cost of imports, especially crude oil. This could put extra pressure on inflation.
In the Indian markets, the biggest issue now is how the USD/INR change could affect Bitcoin. As Indians mostly analyze the movement of Bitcoin in INR, the rupee’s value could significantly influence their positions. Thus, if the rupee’s value rises against the dollar, BTC could see only smaller gains in INR even when the USD price rises. On the other hand, a weaker INR could push the BTC gains higher.
(adsbygoogle = window.adsbygoogle || []).push({});Interestingly, the next important figure is the amount of excess rupee liquidity. Investors should watch how the RBI absorbs this excess liquidity via tools such as reverse repo operations and FX swaps. These actions could influence short-term interest rates, the rupee, and the overall market liquidity.
