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Onshore markets were driven by three key developments over the past week: markets pricing in a more hawkish RBI following the MPC minutes, a surge in inflows through the swap windows, and the upward move in global yields. Ahead of a looming end-month deadline for FCNR (B) deposits, banks have raised a cumulative $72.8bn via the special swap schemes by 21-Aug, up a sharp ~$20bn since mid-Aug. Nearly 90% of these funds i.e. $65.4bn were via the deposit program. Sharp jump here could lead to total FCNR funds top $70-75bn, taking the total to above $80-90bn. Notably, the pace of fund raising accelerated in the past month, with the last $16bn added in nearly a week, vs earlier the same scale over a fortnight. Impact of these inflows would typically be evident in FX reserves, currency, liquidity and deposit growth. Since June, foreign exchange reserves have increased by roughly $35bn to $717bn, bringing the reserve stock close to the record high reached in Feb26. Add to this, deposit growth has strengthened after trailing credit expansion for much of the past year, providing a tailwind to bank funding conditions and helping cap the increase in LDR ratios. Loan growth quickened to 18% yoy in the quarter, on an increase in loans to large industry players and services (to non-banks).
Rupee price action was, however, muted as we discussed here and here. The spot-neutral nature of inflows under the swap windows, increased hedging-related demand, and authorities’ preference to mop-up inflows to gradually lower their exposure in the forwards book, have constrained the room for sharp gains in the rupee. An inability to gain momentum despite a softer USD index led the USDINR to be confined within 95.50-96,00 range, with intervention risks preventing a break above. Concurrently, portfolio flows have picked up, while trade remains a drag. In August, equities witnessed net inflows worth $2.3bn, while funds into debt are nearly flat. In FY27 YTD, foreign interest in equities remains in red but nearly offset by ~$7.3bn into the debt markets. While inflows are catching steam, other pressure points remain, by way of average monthly goods deficit maintaining a sizeable beat of -$30bn in the last three months, larger than $17bn surplus by services.
Bond yields climbed after the Aug MPC minutes prompted a significant repricing in the rates market. OIS markets moved meaningfully higher, with markets beginning to price a non-trivial probability of a hike over coming meetings. Ahead of October rate review, the focus shifts to Aug and Sep CPI outcomes, oil prices, post-FCNR market dynamics and RBI communication. The interaction of these factors will be critical in determining whether the recent repricing in rate expectations has further room to run and whether our baseline call requires adjustment. INR 10Y yields are expected to stay around 6.80-6.90%, while global yields stay firm, with the US authorities expected to initiate steps to rein in longer-end bond yields and prevent a spillover into broader borrowing costs. 
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