New Delhi's bid to attract foreign funds through a special scheme has helped power $73 billion in inflows in the last 11 weeks, driven by the incentives offered to non-resident Indians for making foreign currency deposits in Indian banks.
The move aimed to shore up the Indian rupee, which remains weak amid a rising energy import bill and an exodus of foreign capital.
Despite the recent spike in energy prices, the rupee has been relatively stable, as these inflows have provided headroom for the Reserve Bank of India to intervene in the currency market, Gaura Sengupta, chief economist at India's IDFC First Bank, told CNBC.
The RBI is using these inflows to minimize the "volatility" but not to "influence the direction" of the local currency, she said, adding that her firm pegs the rupee to settle at around 96.50 per dollar by March 2027. It was trading at 95.7 on Tuesday.
The country's finance ministry has called the incentivized deposit scheme, also known as Foreign Currency Non-Resident (Bank) deposits, India's "largest and fastest foreign-currency mobilization exercises."
More than $65 billion of the inflows came to these bank deposits, India's finance ministry said Monday, and the deposits could rise to nearly $80 billion before the incentives end on Aug. 31, according to global brokerage Nomura.
In 2013, a similar move led to inflows of $26 billion over three months, according to the official release. These inflows have "fortified" India's external buffers with "maximum cost-efficiency," the ministry said.
In June, India's central bank started offering special incentives on foreign currency bank deposits of non-resident Indians, on overseas foreign currency borrowings, and on external commercial borrowings. Jefferies said in a report on Monday that these inflows had exceeded expectations and, combined, could raise up to $100 billion by the end of this month.
India has been battling foreign capital outflows as its trade deficit has widened amid high global energy prices. In March, foreign investors sold a record $12.7 billion of Indian equities. As of August, foreign investors have sold $24.5 billion in direct equity so far this year, higher than the $18.9 billion sold last year.
Meanwhile, the country's trade deficit widened to $49.3 billion between April and July this year from $32.3 billion a year ago. During this time, India's energy imports, which account for more than a quarter of its purchases, rose nearly 22%, as per data from the trade ministry.
As a result, the local currency has been under pressure and is among the worst-performing Asian currencies against the dollar, data from LSEG showed. Since the start of the year, the rupee has weakened by 6.5% against the dollar.
Global brokerage Citi expects India to report a balance of payments surplus of $53 billion for the financial year ending March 2027, lower than the $60 billion reported a year ago.
It cautioned that after August, once the incentivized deposit scheme closes, the balance of payments trajectory will depend on oil prices and inflows of foreign direct investment and foreign portfolio investment.
