The Reserve Bank of India has unveiled a comprehensive package of measures to attract dollar inflows amid rupee weakness and declining foreign reserves. According to Business Standard, the package includes six key components: scrapping tax on foreign institutional investor earnings from government bonds, widening the menu of government securities foreigners can buy freely under the Fully Accessible Route, easing NRI access to Indian shares without market registration, offering cheap hedging facilities for public sector firms' overseas borrowings, opening a special FCNR(B) deposit window, and allowing banks to borrow under the Overseas Foreign Currency Borrowing route. The RBI is charging only 1.5% from public sector units and banks for swapping dollars for rupees for the maximum five-year period, with the window covering fresh deposits until September 30 and swaps executable until mid-October.
As reported by Business Standard, the success of these measures hinges on whether India can strengthen its balance of payments over the next three to five years. ECBs and FCNR(B) deposits will need to be repaid as they mature, reversing the inflows and requiring either a stronger balance of payments or larger foreign exchange reserves to absorb the outflows without pressuring the rupee. Currently, India's forex reserves have slipped from a February peak of roughly $728 billion to around $682 billion, while the rupee was hovering at 95 to the dollar, down about 6% for the year. The RBI is absorbing the roughly 3% hedging cost that banks typically carry when converting deposits to rupees, with banks open to additional exchange rate risks of 0.5% to 0.75% if they choose to hedge interest rate components.
According to Business Standard, India's balance of payments has grown volatile in recent years due to swings in capital flows. After recording a surplus in FY23-24, the country posted deficits in FY25 and FY26, reflecting weak financial inflows, particularly on the capital account. Dhiraj Nim, economist and FX strategist at ANZ Bank, emphasized that India's foreign exchange reserves need to rise organically to the extent that the RBI can retire this debt three to five years later. The country has yet to establish a leading position in emerging sectors such as artificial intelligence, while the outlook for software exports—a key source of foreign exchange earnings—is becoming more uncertain.
As reported by Business Standard, NRIs can leverage their FCNR(B) deposits through banks, with many allowing nine times leverage, potentially delivering annualized returns of 12% at five times leverage and 17-27% at seven-to-ten times leverage. Brokerage estimates suggest inflows between $30-60 billion, with analysts leaning toward the lower-to-middle band of $30-45 billion. At the top end, the inflow would represent only around 2% of the banking system's deposit base—useful ballast for the balance of payments and rupee, but not a structural fix. The heavy lifting this time is being done not by the rate gap but by the RBI's full absorption of the hedging cost, unlike the 2013 crisis when the central bank only partially subsidized this expense.
