The Indian Rupee has shown strengthening against the US Dollar, reaching its highest level in over two months. During initial trading, the rupee rose to 94.27 per dollar, marking the strongest level for the rupee since June 29. On Wednesday, the rupee closed at 94.98, indicating a significant strengthening of its position in a single day.
According to Bloomberg data, on Thursday, the rupee's value increased by approximately 0.74% against the dollar, reaching the mark of 94.2712. However, this strengthening subsequently eased slightly to about 0.5%. Currently, the level of 94 rupees is considered quite significant for the dollar-to-rupee exchange rate. If the exchange rate falls below 94 and remains there, exporters may increase their hedging operations, which could potentially lead to a further strengthening of the rupee to 92.50 per dollar. Therefore, market attention in the coming days will be focused on the 94 level.
The main reason cited for the rupee's strengthening is the sale of dollars by the Reserve Bank of India (RBI) and a significant inflow of foreign reserves into the country. Several months ago, the RBI launched a special program to attract foreign currency—FCNR(B) deposits for non-residents (banks). The RBI attracted a total of $136.37 billion in foreign currency by August 31. The largest share of this came from funds contributed by expatriates.
According to available data, $127.2 billion was received through FCNR(B) deposits. Additionally, $5.26 billion was obtained from external loans from abroad, and $3.89 billion from External Commercial Borrowing (ECB). Notably, it was initially expected that only $50–60 billion would arrive through this scheme, but the target was later increased to $80 billion, although the actual amount turned out to be significantly higher.
The RBI initiated this special currency program on June 8, when pressure on the rupee was intensifying. The rupee was losing value due to tensions in the Middle East, high crude oil prices, and dwindling foreign exchange reserves. In this situation, the RBI provided an opportunity for banks and other intermediaries to attract foreign currency to increase the availability of dollars in the country and support the rupee. Under these circumstances, the RBI adopted a strategy to encourage FCNR(B) deposits among NRIs to attract foreign currency.
The FCNR(B) account for NRIs is a term deposit. NRIs can place their foreign income in India in foreign currency without the need for prior conversion into Indian rupees. The advantage of this account is that both the principal amount and the accrued interest are returned in the same foreign currency, eliminating the risk of rupee fluctuations for NRIs.
According to FX analyst Anindya Banerjee from Kotak Securities, the rupee is currently benefiting from three factors. Firstly, the significant inflow of foreign currency thanks to the RBI program, which increases the RBI's capacity to manage the rupee. Secondly, market confidence in the economy has improved due to strong Indian GDP figures. Thirdly, the sufficient volume of funds in the banking system supports economic activity. Banerjee predicts that the total inflow of foreign reserves through this RBI program could reach $145 billion.
The option to accept new deposits under the FCNR(B) program was closed on August 31, approximately one month earlier than planned. This indicates that the program received a greater positive response than anticipated. Nevertheless, the currency swap service with the RBI will remain available until September 11. Furthermore, services related to ECB and OFCB will remain open until December 31. According to CareEdge Ratings, the inflow of large sums under this program has increased liquidity in the banking system, which will provide banks with some relief in attracting future financing.