India attracts $136 billion in expatriate deposits as part of rupee support measures
Key Facts
An Indian facility aimed at attracting foreign currency deposits from expatriates drew $136 billion before closing, as part of central bank measures to support the rupee, according to a Reuters report published on October 12. The bank had announced incentives in June for banks to attract these deposits from non-resident Indians, making their savings one channel for responding to pressure on the currency. The fundraising ran from the launch of the incentives until the facility closed before the report was published, which said "the facility, now closed, attracted $136 billion." The deposits were attracted at a time when the rupee faced pressure from rising oil prices, according to Reuters. The agency added that continued selling of Indian equities by foreign investors was also weighing on the currency as the central bank acted through deposits and foreign exchange market rules.
As part of measures announced in October, the central bank required foreign exchange dealers to hold a 20% risk reserve on derivative hedging contracts covered by the decision, according to Reuters. The requirement applies to hedging foreign currency needs linked to current account transactions, the area targeted by the new reserve requirements. Bankers told the agency that the expansion of cash deposit requirements for foreign exchange hedges had caused confusion among banks. This prompted some banks to stop quoting dollar-rupee forward contracts in the interbank market. In the market, the rupee rose on October 13 to its strongest level in a month, supported by the central bank's measures, according to Reuters. The agency also attributed the recovery to possible intervention in the spot market, as the effects of the new requirements on hedging transactions emerged.
Against the backdrop of moves to support the rupee, India's merchandise trade deficit widened to $30.21 billion in September from $26.86 billion in August, according to Reuters. Merchandise exports totalled $44.40 billion in September, according to a statement from India's Ministry of Commerce and Industry, while imports exceeded that value. Merchandise imports in the same month stood at $74.61 billion, bringing the gap between the two sides of merchandise trade to the reported deficit. Including both goods and services, the estimated overall trade deficit stood at $13.30 billion in September, according to the ministry. That compares with an overall deficit of $14.17 billion in September of the previous year, meaning the balance including services recorded a smaller deficit year on year, while the merchandise deficit widened compared with August.
The foreign exchange measures were accompanied by monetary tightening, as the Monetary Policy Committee unanimously raised the repo rate by 25 basis points to 5.50% at its October meeting, according to a Reuters report on the minutes. In its decision that month, the central bank shifted its monetary policy stance from neutral to "gradual tightening," alongside the interest rate increase. The decision came as consumer price inflation accelerated to 5.54% in September, exceeding expectations, according to the agency. On economic activity, gross domestic product growth reached 7.8% in the April–June quarter, compared with the central bank's forecast of 7% for the same period. That performance put growth above the bank's estimate, while the monetary policy meeting minutes warned of broadening price pressures across the economy. Governor Sanjay Malhotra said in the minutes published on October 21: "There are growing signs that inflation is spreading more broadly."