Yet the rupee tells a very different story. At around 95.31 to the dollar, the currency is almost exactly where it was when the special schemes were announced in early June. The apparent disconnect has triggered a natural question — if India is attracting so many dollars, why is the rupee not strengthening?
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The answer lies in understanding what the RBI is actually trying to achieve. The latest measures are less about engineering a stronger rupee and more about ensuring that India never runs short of dollars when global conditions become difficult.
A different way of defending the rupee
Traditionally, when the rupee comes under pressure, the RBI responds by selling dollars from its reserves and buying rupees. The mechanism is straightforward. More dollars in the market ease shortages of the US currency and help slow the rupee’s decline. The problem is that this strategy consumes reserves. Every intervention reduces the stock of dollars available for future defence which in future can hit the market confidence.
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The June package marks a shift in approach. Instead of relying only on reserves accumulated in the past, policymakers are trying to bring fresh dollars into the country before stress becomes severe. The objective is to build a pipeline of foreign currency that can supplement existing reserves and reassure markets that India has ample resources to deal with volatility.By July 31, the RBI said the special facilities had brought in $40.81 billion. Of this, FCNR(B) deposits accounted for $36.72 billion. Another $1.5 billion came through the external commercial borrowing swap facility, while overseas foreign-currency borrowings by authorised lenders contributed $2.57 billion.
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Several economists now believe the final mobilisation could be far larger. Estimates range from $70 billion to as much as $100 billion if inflows continue at the current pace. “If the current pace of FCNR(B) inflows, as reflected in the central bank data, continues, we may well see a three-digit US dollar billion mobilisation, significantly exceeding the initial estimates of $50-60 billion,” VRC Reddy, head of treasury, Karur Vysya Bank, has told ET. “The momentum so far has been a pleasant surprise.”
Why FCNR(B) has become the star attraction
The overwhelming bulk of the inflows has come through FCNR(B) deposits. These are foreign-currency deposits maintained by non-resident Indians with Indian banks. Depositors place dollars with banks and receive dollars back, along with interest, when the deposits mature. The attraction for depositors is obvious as they earn returns without taking rupee depreciation risk. The attraction for banks comes from the RBI’s special swap window. Banks can hand over these dollars to the RBI and receive rupees in return. When the deposits mature after three to five years, the transaction is reversed.
Without such a facility, banks would have to spend money hedging against currency movements. A sharp fall in the rupee could make repayment of dollar deposits significantly more expensive. The RBI’s scheme effectively absorbs much of that risk.
The result is a powerful incentive structure. Depositors avoid exchange-rate risk. Banks receive protection against adverse currency movements. The RBI gains access to large quantities of dollars. This combination explains why inflows have exceeded expectations so quickly.
If dollars are pouring in, why isn’t the rupee soaring?
This is where much of the confusion begins. Many people assume that a flood of dollars must automatically strengthen the rupee. That would generally be true if those dollars were entering the foreign-exchange market and being sold openly.
FCNR(B) inflows work differently. When banks mobilise these deposits and swap them with the RBI, the dollars largely move into the central bank’s balance sheet rather than directly increasing dollar supply in the spot market. As a result, the immediate impact on the exchange rate is smaller than one might expect from the headline inflow numbers. More importantly, the RBI is not trying to force the rupee higher. Policymakers appear willing to tolerate gradual depreciation if global conditions warrant it. What they want to avoid is a disorderly move driven by panic, a shortage of dollars, speculative bets against rupee, a sudden loss of confidence and thus even a run on the rupee in extreme circumstances.
In that sense, the relevant question is not why the rupee has failed to appreciate. The more useful question is how much weaker it might have been without these inflows or how much risky it would have become.
Building deterrence against market stress
The biggest contribution of the programme may be psychological rather than mechanical. Currency markets are heavily influenced by expectations. When investors believe a central bank has ample resources to defend its currency, aggressive bets against that currency become less attractive. The June package substantially increases the pool of dollars available to India. Even though many of these inflows carry future repayment obligations, they strengthen the country’s near-term external position and expand the RBI’s room for manoeuvre.
This matters at a time when oil prices remain elevated, geopolitical tensions continue to unsettle markets and the dollar itself has remained strong globally. The message to markets is that India is not waiting for a crisis before securing additional foreign currency but it is doing so in advance.
Borrowing abroad becomes easier
Another part of the package encourages companies and banks to raise money overseas. Under the special facilities, eligible borrowers can raise foreign-currency loans and swap them with the RBI. The arrangement reduces uncertainty around future exchange-rate movements. For many companies, currency risk is often the biggest obstacle to overseas borrowing. A loan that looks attractive because of lower foreign interest rates can become expensive if the rupee weakens sharply.
By reducing that uncertainty, the RBI hopes to make foreign borrowing more predictable and encourage additional inflows. So far, these channels have contributed much less than FCNR(B) deposits. But the facilities remain open longer, giving borrowers additional time to access overseas capital markets.
Government bonds provide a market route
Alongside the RBI’s initiatives, the government has also attempted to attract foreign money into Indian bonds. Tax exemptions on interest income and capital gains from government securities have improved post-tax returns for overseas investors. Market access has also been widened through changes to the Fully Accessible Route and other investment norms. Foreign investors responded quickly. Purchases of government securities increased after the reforms, bringing additional dollars into India as investors converted foreign currency into rupees to buy bonds.
Unlike FCNR(B) deposits, however, portfolio flows are inherently more volatile. A non-resident deposit locked in for several years cannot leave overnight. A bond investor can sell securities, buy dollars and exit within days if global conditions deteriorate. That makes bond inflows valuable but less stable.
More dollars means more ammo, not stronger rupee
The real significance of the RBI’s strategy lies in how it changes India’s external position. The programme is giving policymakers access to a larger pool of dollars without forcing them to deplete existing reserves every time the rupee comes under pressure. It broadens the sources of foreign currency, strengthens confidence and reduces the risk of a sudden funding squeeze.
None of this guarantees a stronger rupee. The currency will still be influenced by oil prices, global interest rates, geopolitical developments and investor sentiment. The inflows are also not permanent. FCNR(B) deposits will mature, swaps will reverse and foreign loans will need repayment.
But the immediate objective is not to push the rupee back to a particular level. It is to ensure that India has enough dollars to navigate an uncertain global environment without facing the kind of external stress that has periodically shaken emerging markets. Measured against that goal, the programme is already reshaping the currency playbook. India is no longer relying only on the dollars it has accumulated. It is actively persuading the world to bring more.