India’s special push to attract foreign currency has delivered an unprecedented response, with banks mobilising $136.38 billion through the Reserve Bank of India’s (RBI) dollar-rupee swap facility by August 31.
FCNR(B) deposits accounted for $127.23 billion, or more than 93% of the total inflows. Overseas foreign-currency borrowings contributed $5.26 billion, while external commercial borrowings added $3.89 billion, according to provisional RBI data.
The numbers are far above initial expectations. The scale of the inflows has strengthened India’s foreign exchange position, but it has also raised questions about the eventual cost of the RBI’s support for the scheme.
Economists have estimated that the central bank could face a potential cost of around $10.6 billion over several years. However, this is an estimate and does not represent a confirmed loss or liability for the RBI.
The Centre has taken a more reassuring view. Officials expect the RBI to earn returns by investing the incoming dollars in overseas assets, which could offset much of the cost associated with providing currency protection to banks.
The RBI introduced the special USD-INR forex swap facility in June to encourage banks to bring more foreign currency into India. The programme was designed to strengthen forex reserves and provide additional support to the rupee amid global economic and geopolitical uncertainty.
The response was particularly strong from overseas Indians. The FCNR(B) window was originally expected to remain open until September 30 but was closed on August 31 after inflows surged well beyond expectations.
The sharp increase also came largely through the leverage route. Around 80% of FCNR(B) inflows are estimated to have been raised through leveraged structures, while a significant share of deposits were placed for longer tenures.
The attractiveness of the scheme helped deposits rise sharply in the final weeks. FCNR(B) inflows had stood at around $52.3 billion on August 13 before climbing to more than $127 billion by the end of August.
The dollar inflows have provided a major boost to India’s foreign exchange reserves. Reserves rose to a record $740.8 billion in the week ended August 28, marking the ninth consecutive weekly increase.
Foreign currency assets accounted for $600.67 billion, while gold reserves stood at $116.41 billion. The larger reserve cushion gives the RBI greater room to manage volatility in the rupee and respond to sudden changes in global capital flows.
But the dollar windfall has created another challenge for the central bank — surplus rupee liquidity.
When banks bring dollars into the RBI-backed arrangement, they receive rupees in exchange. This injects additional funds into the domestic banking system. Surplus liquidity subsequently climbed to around ₹10.3 lakh crore, forcing the RBI to step up its liquidity-management operations.
The central bank absorbed more than ₹6 lakh crore through variable-rate reverse repo auctions on Friday. It has also planned further operations to drain excess funds from the banking system.
The RBI now has to balance two objectives: retaining the benefits of the foreign-currency inflows while ensuring that the resulting rupee liquidity does not create distortions in money markets or add unnecessary inflationary pressure.
For banks, the scheme has provided a large pool of foreign-currency funding. It could also support earnings, although the surge in deposits may put pressure on margins depending on how effectively lenders deploy the funds.
The longer-term cost for the RBI remains uncertain.
Under the swap arrangement, the central bank takes on part of the currency risk associated with the foreign-currency deposits. The eventual impact will depend on movements in the rupee, global interest rates and returns earned on the dollars invested overseas.
This is why the estimated $10.6-billion cost needs to be viewed cautiously. A significant portion could potentially be offset by investment income, meaning the headline figure should not automatically be interpreted as a direct loss to the central bank.
The inflows also come with future obligations. Most FCNR(B) deposits have multi-year maturities, meaning Indian banks will eventually need to return the foreign currency to depositors. The RBI will have to manage these dollar liabilities alongside its broader foreign exchange operations.
India has gained a substantial increase in foreign currency resources, while the rupee has received additional support from the improved dollar supply.
The success of the scheme has also demonstrated the continued importance of NRI deposits and overseas Indian savings as a source of foreign currency for the Indian banking system.
The challenge has now shifted from attracting dollars to managing them effectively.
The RBI must absorb the excess rupee liquidity, manage the currency risks created by the swap facility and ensure that the eventual financial cost remains contained.
