India has attracted over $73 billion in foreign currency inflows in the last 11 weeks, largely driven by special deposit schemes for non-resident Indians (NRIs). The influx is a strategic move to counter foreign capital outflows and a widening trade deficit amidst rising energy prices.
The NRI deposits alone have contributed nearly $65 billion, with projections suggesting they could reach $80 billion before incentives end. This financial boost is aiding the Reserve Bank of India in managing the rupee’s volatility, though significant challenges like a growing trade deficit and past investor sell-offs persist.
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New Delhi has successfully attracted a significant surge of foreign currency, raking in over $73 billion in just 11 weeks, largely propelled by a special deposit scheme designed to entice non-resident Indians (NRIs). This strategic move by India aims to bolster its foreign exchange reserves at a time when the nation is grappling with substantial foreign capital outflows and a widening trade deficit exacerbated by rising energy prices.
The cornerstone of this financial influx has been the Foreign Currency Non-Resident (Bank) deposit scheme, which has seen NRIs deposit nearly $65 billion. Analysts at Nomura predict that these deposits could climb even higher, potentially reaching $80 billion before the attractive incentives expire on August 31.
This initiative, described by India's finance ministry as its "largest and fastest foreign-currency mobilization exercises," is crucial for stabilizing the Indian rupee. The rupee has faced considerable pressure due to increased energy import costs and a notable exodus of foreign investment from Indian markets. In March alone, foreign investors divested a record $12.7 billion from Indian equities, and year-to-date figures show even higher outflows compared to the previous year.
Gaura Sengupta, chief economist at IDFC First Bank, explained to CNBC that these inflows provide the Reserve Bank of India with the necessary flexibility to manage currency volatility without directly dictating its direction. The central bank is reportedly using these funds to cushion the rupee, which was trading at 95.7 against the dollar on Tuesday, with IDFC First Bank projecting a settlement around 96.50 by March 2027.
The success of this deposit scheme is underscored by a comparison to a similar initiative in 2013, which yielded $26 billion over three months. The finance ministry highlighted that these recent inflows have "fortified" India's external financial buffers with "maximum cost-efficiency." Jefferies has estimated that the combined effect of various incentive schemes could lead to inflows of up to $100 billion by the end of August.
Despite these positive developments, challenges remain. The country's trade deficit widened to $49.3 billion between April and July, a significant increase from the previous year, driven partly by a nearly 22% rise in energy imports. This economic backdrop has placed the rupee among the weaker performing Asian currencies against the dollar, having depreciated by 6.5% year-to-date.
Looking ahead, Citi forecasts a balance of payments surplus of $53 billion for the financial year ending March 2027. However, the firm cautions that post-August, the trajectory of the balance of payments will heavily rely on global oil prices and the resurgence of foreign direct and portfolio investments.
