FCNR(B) inflows boost banking liquidity, ease money market rates: Crisil

Foreign currency inflows into India, led by a sharp increase in Foreign Currency Non-Resident (Bank) FCNR(B)FCNR(B) deposits, improved financial conditions in August, with banks mobilising $127.2 billion through such deposits by the end of the month, according to a Crisil report.

The inflows provided some support to the rupee, but their larger impact was the infusion of rupee liquidity into the banking system. India mobilised a total of $136.4 billion in foreign currency inflows, including FCNR(B) deposits, as of the end of August. FCNR(B) deposits stood at $36.7 billion at the end of July.

Liquidity surplus rises, money market rates ease

The surplus in systemic liquidity increased in August, driven by FCNR(B) inflows and a pickup in government spending. The Reserve Bank of India (RBI) net-absorbed ₹3.67 lakh crore, or 1.3% of net demand and time liabilities (NDTL), in August, compared with ₹1.07 lakh crore, or 0.4% of NDTL, in July.

The higher liquidity surplus led to an easing of short-term money market rates. The weighted average call rate (WACR) fell 15 basis points (bps) to an average of 5.15%, below the RBI’s 5.25% repo rate. Other money market rates also eased, with six-month certificates of deposit declining 14 bps to 6.77%, six-month commercial paper falling 11 bps to 7.22%, and the 91-day Treasury bill rate easing 2 bps to 5.28%.

Systemic liquidity surged further in September, with the RBI recording average net absorption of ₹10.3 lakh crore through September 15.

Bank credit growth remained strong at 19.1% in August, marginally lower than 19.3% in July. Sectoral data for July showed credit to services and industry growing 22.9% and 20%, respectively.

Rupee gains marginally; equities end lower

The rupee appreciated 0.4% month-on-month, averaging ₹95.5 per US dollar in August, compared with ₹95.8 in July. Besides FCNR(B) inflows, a weaker US dollar, a narrower trade deficit, and foreign portfolio investor (FPI) inflows supported the Indian currency.

FPIs remained net buyers in August, although net inflows slowed to $2.7 billion from $4.2 billion in July. Equities accounted for the bulk of the inflows, attracting $3.1 billion, compared with $2.1 billion in July. The debt segment, however, recorded net outflows of $0.2 billion, against net inflows of $1.9 billion in July, amid higher US Treasury yields.

Indian equity markets recorded mild gains on average during August but declined on a month-end basis. The S&P BSE Sensex and NSE Nifty 50 ended the month 1.5% and 1.2% lower, respectively, as escalating geopolitical uncertainties and elevated crude oil prices weighed on investor sentiment.

The benchmark 10-year government security (G-sec) yield rose to an average of 6.82% in August from 6.77% in July. On a month-end basis, the yield increased 12 bps, pressured by renewed increases in Brent crude oil prices, persistent strength in US 10-year Treasury yields, and a reversal to FPI outflows from the debt segment. The announcement of the early closure of the FCNR(B) swap window also dented investor sentiment.

Global yields, West Asia conflict pose risks

Crisil expects financial conditions to remain volatile in the near term, with global monetary conditions emerging as a key risk. Capital flows could remain unsettled amid the conflict in West Asia and rising global bond yields.

In September, the US 10-year Treasury yield touched 5%, while the 10-year Japanese government bond yield crossed 3%. Rising inflation expectations have increased the likelihood of rate hikes by major central banks, the report said.

Crisil also expects the RBI’s Monetary Policy Committee to raise interest rates amid rising inflation and slowing growth. It projects retail inflation at 5.1% in the current fiscal, compared with 2% in the previous fiscal, citing an adverse base effect, the expected pass-through of higher input costs to retail prices, and risks from a below-normal southwest monsoon.

While the growth outlook has improved following better-than-expected first-quarter performance, growth is likely to moderate in the second half of FY27 as global growth slows and the peak impact of goods and services tax rate rationalisation fades. Agriculture and the rural economy could also be adversely affected by unfavourable monsoon conditions and El Niño risks.

The RBI has restarted open market operations in September, which Crisil expects will help absorb excess liquidity. The central bank has announced G-sec sales worth ₹1 lakh crore in September, to be conducted in three tranches.