E-Paper
Forex boost delivered, over to markets now
India's forex swap facility attracted $136.4 billion in foreign currency, boosting liquidity but highlighting the need for revived capital flows ahead.
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The forex swap facility, including an FCNR deposit scheme, launched in June has attracted $136.4 billion in foreign currency, the Reserve Bank of India (RBI) said on Wednesday. What are its larger macroeconomic implications? Three of them can be listed.
The scheme was launched as a one-time foreign currency mobilisation effort in the wake of weak capital flows to India, which could have put pressure on the external account despite a relatively benign current account deficit. The objective has been achieved for now. However, the FCNR deposit scheme is a one-time arrangement that can’t be deployed on a more regular basis to manage current account deficits. Capital flows will need to revive going forward.
While the scheme has fulfilled its primary objective, it is not a costless exercise. The reason why it attracted such large inflows was the highly attractive returns being offered to the depositors. The RBI has offered to cover the costs of currency depreciation for the banks offering these deposits and its closure has seen rates being revised downby three percentage points. The cost will eventually reflect in things such as lower RBI dividends to the exchequer overtime.
Its medium to long-term implications aside, the scheme will also have an immediate fallout. The most important of them all is the sharp spike in banking system liquidity, which data shows increased from ₹1.85 lakh crore on June 5 to ₹7.8 lakh crore on September 1. This will have to be taken care of by the central bank via various policy interventions.
Is there a simpler takeaway beyond these technical details? It is the following: India’s macro-credibility, when backed with the sovereign’s commitment, remains strong with investors. The challenge is to make India’s markets as convincing about their long-term returns.
