The Indian rupee finished higher on Friday, capping a weekly gain supported by a surge in dollar liquidity as a special deposit facility nears its close.

Early weakness in the currency was reversed as inflows prompted traders to unwind positions, according to the report by Economic Times Markets. The rupee came under pressure from month-end importer dollar demand, but favorable flows tied to MSCI index rebalancing provided relief.

The special deposit facility in question refers to the window under which banks have mobilized dollar deposits — a mechanism associated with the Reserve Bank of India's efforts to bolster foreign exchange inflows. The report notes that the FCNR (B) scheme has garnered about USD 65 billion, a related Economic Times analysis examines why the rupee has not strengthened commensurately. FCNR (B) — Foreign Currency Non-Resident (Bank) — accounts allow non-resident Indians to hold term deposits in foreign currency with Indian banks, so the deposits add to dollar supply without directly converting into rupee demand. The RBI has used such windows in the past, notably in 2013, to shore up foreign exchange reserves during episodes of currency pressure.

MSCI rebalancing typically generates portfolio flows as funds tracking the index adjust their holdings to match revised index weights, and such flows can influence currency demand around the rebalancing date.

The rupee's weekly advance comes as market participants weigh the interplay of importer demand, index-related inflows, and the approaching end of the deposit window that has boosted dollar supply in the domestic market. With the deposit window set to close, attention turns to whether the elevated dollar supply persists or tapers, alongside regular factors such as oil-related importer payments and portfolio flows that typically shape the currency's trajectory.

Source: Economic Times Markets