Indian Rupee: Flows-focused support and wider fiscal stance – Societe Generale

§ 01 Executive Snapshot

• What: The Government of India and the Reserve Bank of India (RBI) are implementing measures to support the Indian Rupee (INR) by attracting capital inflows.
• Who: Government of India, Reserve Bank of India (RBI), foreign portfolio investors (FPIs).
• Why it matters: This approach signifies a shift towards a flows-driven strategy rather than tightening monetary policy, aiming to stabilize the INR amidst global economic pressures.

§ 02 Key Developments

• The Government of India has removed withholding tax for FPIs on government securities income to enhance bond market inflows.
• Banks are incentivized to raise Foreign Currency Non-Resident (FCNR(B)) deposits with attractive interest rates of 6-7%+.
• The RBI is absorbing hedging costs to facilitate these deposits.
• A concessional European Central Bank (ECB) swap window has been introduced to boost offshore borrowing.
• The fiscal deficit target has been adjusted to 4.8% of GDP from an earlier goal of 4.3% due to the ongoing war.

§ 03 Strategic Context

• Historically, India has focused on tight monetary policy to manage currency stability; the current shift emphasizes attracting foreign capital instead.
• This strategy aligns with global trends where countries are increasingly looking to bolster their currencies through capital inflow incentives rather than restrictive monetary measures.

§ 04 Strategic Implications

• The immediate consequence could be increased foreign investment in Indian bonds, potentially stabilizing the INR against major currencies.
• In the long term, the broader fiscal stance may lead to structural changes in how India manages its currency and fiscal policies, especially in response to external shocks.

§ 05 Risks & Constraints

• Potential risks include backlash from domestic stakeholders regarding the widening fiscal deficit.
• There may also be technical challenges in implementing the new measures effectively, especially concerning foreign investor confidence in the Indian market.

§ 06 Watchlist / Forward Signals

• Upcoming fiscal policy announcements and their alignment with the new deficit target will be critical to watch.
• Monitoring foreign capital inflows into Indian bonds and the performance of the INR will indicate the effectiveness of the measures implemented.