FCNR inflows cushion rupee, but FII flows key for stability: Nuvama

FCNR inflows have boosted India's forex reserves, cushioning the rupee and BoP. However, Nuvama Research warns this is a temporary fix and a sustained return of FII flows is crucial for long-term external stability amid a widening trade deficit.

Foreign currency non-resident (FCNR) inflows have provided a significant cushion to the rupee and India's balance of payments (BoP), but a sustained improvement in external stability will eventually depend on the return of foreign institutional investor (FII) flows, Nuvama Research said in its latest economy report.

FCNR Inflows Provide Temporary Cushion

The report said FCNR inflows have helped boost India's foreign exchange reserves by around USD 100 billion, providing support to both the rupee and the BoP amid weak FII flows.

The report described the situation as one where “FCNR deposits have cushioned BoP”, but cautioned that the support may not be sufficient over the longer term. “FCNR inflows have stabilised INR and BoP for now, but sustained external stability will eventually require a meaningful return of FII flows,” Nuvama said.

The report noted that FCNR deposits have supported the capital account at a time when FII flows have remained weak. It also showed that the rupee has stabilised following the rise in FCNR deposits.

Impact on Domestic Liquidity

The report also highlighted that the support from FCNR inflows has had a broader impact on domestic liquidity. Systemic liquidity rose from around 1 per cent to 3 per cent of net demand and time liabilities (NDTL) in September following the inflows. However, the report said the boost to credit growth from easier liquidity could remain limited, with bank credit growth already running at around 19 per cent over the past two months and an adverse base effect expected from October.

Widening Trade Deficit a Growing Concern

At the same time, Nuvama flagged a growing gap in India's external trade position. Services exports and NRI remittances continue to provide significant support to the current account, but the report said they are increasingly masking a deterioration in the goods trade balance.

India's goods deficit has reached a decade-high of around 9 per cent of GDP, even as nominal GDP growth remains near decade lows, according to the report. Nuvama said this makes a sustained return of FII flows important for maintaining external stability as the support from FCNR inflows is absorbed over time. (ANI)

(Except for the headline, this story has not been edited by Asianetnews Editorial staff and is published from a syndicated feed.)