Indian Rupee: Reserve buffer and carry dynamics – Societe Generale

Societe Generale strategists note that India’s FX reserves surged by $44.9bn to a record $785.7bn in early September, largely due to Reserve Bank of India (RBI) mobilisation measures such as the FCNR(B) scheme. They expect the pace of reserve accumulation to slow, but highlight that the larger buffer enhances RBI’s ability to smooth volatility and support the Indian Rupee (INR), even as narrowing yield spreads and higher Oil prices weigh on carry appeal.

Reserves rise as carry appeal fades

"In Asia, India FX reserves surged by $44.9bn to a record $785.7bn in the week ended 4 September, reflecting the impact of the RBI mobilisation measures, including the FCNR(B) scheme that was closed a month ahead of schedule at end-August."

"The pace of reserve accumulation may now slow but the larger reserve buffer gives the RBI considerably more firepower to smooth volatility and support the INR when required."

"Even so, the narrowing of the 10y IGB-UST yield spread to around 200bp is diminishing the rupee's carry appeal, particularly as higher oil prices deteriorate India's external balance."

"In that regard, the pressure is increasingly on the RBI to keep pace with the global tightening cycle."