The Reserve Bank of India (RBI) is deploying a multi-pronged strategy to strengthen the country’s foreign exchange reserves, ease domestic liquidity and shield the rupee from mounting global uncertainties, signalling a shift from reactive intervention to pre-emptive reserve building.
The central bank’s latest package of measures to attract foreign currency inflows comes at a time when imported inflation is rising, crude oil prices remain elevated due to geopolitical tensions in West Asia, and capital flows into emerging es are becoming increasingly volatile. The objective extends beyond stabilising the rupee in the near term; it is also aimed at ensuring that the banking system has adequate foreign currency resources to withstand external shocks while maintaining orderly liquidity conditions.
Imported inflation accelerated to 8.13 per cent in June from 7.23 per cent in May, underscoring the growing influence of exchange rate movements on domestic prices. Consumer price inflation is projected to average around 5 per cent during 2026-27, making currency management an increasingly important component of the RBI’s inflation strategy.
The central bank has revived a playbook reminiscent of its successful 2013 response to the taper tantrum, but with important structural changes designed to encourage larger and more durable foreign currency inflows. The package includes incentives for Foreign Currency Non-Resident (Bank), or FCNR(B), deposits, easier external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCB) by banks.
Unlike the 2013 programme, when banks had to absorb a significant portion of hedging costs despite a concessional swap window, the RBI is now bearing the entire hedging cost on the principal amount of fresh FCNR(B) deposits. The move substantially lowers the cost of mobilising overseas funds for banks and improves the economics of raising long-term foreign currency deposits.
Market participants indicate that foreign currency mobilisation through FCNR(B) deposits, ECBs and OFCB may have exceeded USD 10 billion and is likely to reach USD 80 billion by September 30, 2026, when the special window closes.
This would significantly strengthen India’s external position. Banks could lower overseas borrowing costs by 200-250 basis points through the concessional swap framework, improving funding efficiency while supporting credit growth.
Another notable difference from the 2013 scheme is the regulator’s decision to provide operational clarity at the outset on standby letters of credit (SBLCs) and leverage norms. During the earlier programme, uncertainty over these issues delayed participation, resulting in nearly 60 per cent of FCNR(B) inflows arriving only during the final month of the scheme.
This time, inflows seem to have started building from the very first month, suggesting a more evenly distributed mobilisation cycle. The RBI has also provided a longer mobilisation window of nearly four months, giving Indian lenders and their overseas counterparts greater flexibility to structure transactions.
The emphasis has also shifted towards five-year deposits rather than shorter maturities. The government would be hoping that the longer tenure will reduce refinancing and redemption risks that became evident when the 2013 deposits matured in 2016, creating temporary pressure on liquidity and the foreign exchange market.
Yet, despite encouraging capital inflows, the rupee has remained surprisingly range-bound around 95-96 against the US dollar.
Foreign investors have turned net buyers of Indian debt after the government introduced tax-related incentives, with inflows reaching around USD 7.1 billion since early June. Equity inflows have also improved in July. Meanwhile, the RBI’s foreign currency assets, the largest component of the reserves, increased by roughly USD 4.5 billion to USD 545.58 billion during the week ended July 3.
Ordinarily, such inflows would have been expected to strengthen the rupee more visibly. Instead, the currency has traded within a relatively narrow band, suggesting that the RBI has been actively absorbing dollars rather than allowing a sharp appreciation.
Outstanding net forward positions rose sharply to more than USD 106 billion in May from about USD 95 billion in April. The share of short-term forwards also increased, with one-month contracts accounting for a significantly larger proportion of outstanding positions.
Market analysts interpret this as evidence that the RBI has been simultaneously intervening in both spot and forward markets, particularly at the shorter end of the maturity curve. By doing so, it appears to have neutralised excessive volatility, discouraged speculative pressure from offshore non-deliverable forward (NDF) markets and gradually accumulated reserves without triggering abrupt currency movements.
Some market participants believe the RBI has subsequently unwound part of its short-term forward positions as commodity prices moderated towards the end of June, helping maintain stability in the rupee despite a sharp increase in capital inflows.
The strategy effectively allows the central bank to build reserves while preventing excessive currency appreciation that could undermine export competitiveness.
A 40 per cent surge in crude oil imports widened India’s merchandise trade deficit to nearly USD 30 billion in June. Higher energy prices have begun feeding into domestic inflation following retail fuel price adjustments, while uneven monsoon progress has raised concerns over agricultural output, particularly rice and pulses.
Although nationwide rainfall has improved since late June, total crop sowing remains below last year’s levels. Policymakers should continue to monitor food inflation alongside geopolitical developments, both of which have the potential to influence monetary policy over the coming quarters.
The RBI’s foreign currency mobilisation measures are also expected to influence domestic credit conditions.
Non-food bank credit expanded 17.4 per cent year-on-year in May, supported by strong lending to industry and services. Credit to infrastructure, large corporates and non-banking financial companies remained robust, while personal loans and agriculture also continued to record healthy growth.
Improved foreign currency funding should strengthen banks’ liability profiles and narrow the gap between credit growth and deposit mobilisation. Lower hedging costs for ECB borrowers are also expected to encourage large companies to diversify funding sources away from domestic bank loans and towards overseas borrowing and debt markets. That shift could gradually moderate bank credit growth while easing pressure on domestic liquidity.
Rising global credit spreads may reduce appetite for overseas bond issuances, while prolonged geopolitical tensions could disrupt trade, increase freight costs and place additional stress on export-oriented sectors such as textiles, gems and jewellery and engineering goods.
The longer maturity profile of FCNR(B) deposits also means policymakers will eventually have to prepare for their redemption cycle around 2031, much as they successfully managed the maturities of the 2013 scheme.
For now, however, the RBI appears to be pursuing a carefully calibrated strategy that balances multiple objectives simultaneously — attracting stable foreign capital, strengthening reserves, improving banking system liquidity and limiting excessive exchange rate volatility.