India’s low capital inflows hit dollar buying

mumbai — Traders counting on the Reserve Bank of India to keep buying dollars may have to think again. The central bank bought $36 billion of foreign exchange in the 12 months to January, seeking to stem the rupee’s appreciation. That’s likely to change given India’s widening current-account deficit and slowing capital inflows, with Rabobank saying the RBI may instead look to use some of its $420 billion of reserves to plug the dollar spending gap.

India is losing some of its red-hot appeal to foreign investors as a bank scandal, a widening fiscal

$36B of foreign exchange bought by rBI to stem rupee’s appreciation

deficit and the prospects of faster rate hikes by the Federal Reserve erode the allure of its higher-yielding assets. The rupee is the secondworst performing currency in Asia and global funds have turned net sellers of its bonds this year.

“A sudden stop of inflows would lead to declining FX reserves in 2018,” said Hugo Erken, a Utrechtbased senior economist at Rabobank International. “We could be looking at a shortage of $18 billion to cover finance requirements.”

Foreigners have offloaded $405 million of bonds this year, while equity inflows have slowed to $1.5 billion. Global funds bought a combined $11.2 billion of equities and debt in the first quarter of 2017.

“It’s hard to imagine strong flows in 2018 into India if you put together the combination of global and domestic headwinds,” said Shashank Mendiratta, an economist at ANZ in Bengaluru. RBI’s intervention to cap rupee gains will “likely taper off over the next few months,” he said.