Nimesh Vora

India's first rate hike in four years is unlikely to slow or reverse record high capital outflows, leaving the central bank ​battling the vicious cycle of a weakening currency and higher inflation in a hostile global environment.

The dollar-rupee forward premiums soared on Wednesday, with traders bracing for more sell/buy FX ​swaps by the Reserve Bank of India after ‌the central bank announced no new liquidity-withdrawal measures at its policy meeting.

Billions of dollars of FX swaps by the central bank have shifted the economics of cross-currency funding for Indian companies, creating an opportunity to access ​dollar funding at a relatively lower cost.

The Reserve Bank of India's foreign exchange operations have soaked up an estimated $20 billion of excess rupee liquidity, two bankers said, with dollar-rupee swaps playing a ​prominent role in liquidity management.

The Reserve ​Bank of India's use of foreign-exchange swaps to drain surplus rupee liquidity is pushing ‌up forward premiums, indirectly offering support to the rupee.

Indian banks have left much of their future interest payments on overseas FX deposits unhedged, creating a source of potential dollar demand that could compound depreciation ​pressure in a rupee-weakening scenario, five bankers said.

The Indian rupee climbed to a two-month ​high on Thursday after a much larger-than-expected $136.4 billion raised through one-off measures improved the currency's outlook at a time ‌when renewed U.S.-Iran conflict has pushed crude oil prices higher and contributed to a global bond selloff.

The Reserve Bank of India told banks on Thursday they could swap dollars raised from non-resident Indians more than once a week, three currency traders said, ​giving them flexibility to handle large inflows before its subsidised deposit scheme ends.

The Reserve Bank of India has likely used part ‌of the initial inflows from its foreign-currency deposit drive to unwind a portion of its massive foreign exchange forward book, economists said, helping the central bank reduce near-term obligations.

A wave of foreign currency inflows drawn by rupee-support measures the central bank introduced ‌just over a month ago is adding to confidence in India's balance of payments position at a time of heightened oil-price volatility.