India Strategy: Liquidity Deluge From FX Measures

The RBI's new FX measures, while providing limited direct support to the Indian Rupee due to hedging, are expected to cause a significant liquidity surplus in the banking system. This inflow will likely require large-scale reverse-repo operations by the RBI to maintain alignment between money market and policy rates.

Key Takeaways

• 1.RBI's FX measures provide limited INR support due to fully hedged flows, but will significantly increase banking liquidity.
• 2.Increased banking liquidity will help bridge the gap between deposit and credit growth.
• 3.RBI will likely rely on large-scale reverse-repo operations to manage liquidity rather than OMO or FX swaps.

Table of Contents

• Key takeaways
• India in Focus
• RBI’s FX measures offer little direct support to INR
• Tax exemptions renew hopes for another index inclusion
• But FX accretion may lead to a liquidity deluge
• News and Views
• Special Disclosures
• Disclosures

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