Yet the rupee remains close to where it was when the scheme was announced in June, trading around Rs 95-96 to the dollar. The apparent contradiction can raise an obvious question — if India is attracting so many dollars, why is the rupee not strengthening?
The answer lies in understanding where these inflows are headed and what they are designed to achieve. Contrary to popular perception, the primary objective is not to push the rupee higher. It is to dramatically strengthen India’s stock of foreign currency resources, improve its ability to manage external shocks and reduce the risk of a future dollar shortage.
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The FCNR(B) machine that powered the inflows
The overwhelming share of the inflows has come through Foreign Currency Non-Resident (Bank), or FCNR(B), deposits. These are foreign-currency deposits maintained by non-resident Indians with Indian banks. NRIs place dollars with Indian banks and receive their money back in dollars when the deposits mature. Since both the deposit and repayment are in foreign currency, depositors are insulated from rupee depreciation. For overseas Indians sitting on dollar savings, the proposition became even more attractive after the RBI introduced a special swap facility and relaxed certain regulatory conditions.
The result has been extraordinary. FCNR(B) deposits have contributed roughly 90% of total inflows so far. The pace has accelerated sharply as the scheme progressed. What took more than a month to raise initially has recently been mobilised within days, prompting several brokerages to revise their estimates upward.
Unlike portfolio flows that can enter and leave financial markets quickly, these deposits are generally locked in for several years. That gives India access to a relatively stable pool of foreign currency.
Where are the dollars actually going?
A misconception surrounding the programme can be that the dollars are flooding the foreign-exchange market and should therefore be lifting the rupee. That is not what happens. Under the RBI’s swap arrangement, banks collect the foreign currency and exchange those dollars with the central bank in return for rupees. The RBI then adds the dollars to its reserves and balance sheet. In other words, most of the money is being absorbed by the central bank rather than being sold into the spot foreign-exchange market.
Exchange rates respond to supply and demand in the market. If billions of dollars were being sold openly for rupees, the increased supply of dollars would normally strengthen the rupee. Instead, the RBI is effectively warehousing much of the inflow.
As a result, India is receiving dollars, but those dollars are largely ending up inside the country’s reserve stockpile rather than circulating through the market in a way that would significantly strengthen the rupee.
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Why the rupee has barely moved
The rupee’s stability despite record inflows is not an accident. It reflects both the design of the programme and the pressures operating on the currency from elsewhere.
The first reason is the reserve accumulation mechanism. Since the dollars are being transferred to the RBI, they are not creating a large surplus of foreign currency in the market.
The second reason is that demand for dollars remains exceptionally strong. India continues to face a significantly higher energy import bill as crude oil prices remain elevated. Every increase in oil prices translates into greater demand for dollars from refiners and importers. At the same time, Indian companies continue to require dollars for overseas payments and debt servicing. Import demand remains substantial across sectors.
A third factor is the behaviour of foreign investors. India has witnessed sizeable equity outflows this year as global investors have shifted capital across markets. These outflows create additional demand for dollars.
The RBI’s approach has been to use the inflows primarily to reduce volatility rather than force a specific currency level. Policymakers appear comfortable with gradual depreciation of the rupee if global conditions warrant it. What they are trying to avoid is a sudden disorderly fall triggered by dollar shortages or market panic.
Also, the relevant question is not why the rupee has failed to appreciate but how much weaker it might have been without these inflows.
Building a bigger external buffer
The most immediate benefit is the strengthening of India’s external defence. Every additional dollar accumulated by the RBI increases the country’s ability to meet external obligations, intervene during periods of market stress and reassure investors about India’s financial resilience.
Foreign-exchange reserves serve as a country’s insurance policy. They help finance imports, support the currency during volatility and reassure global lenders that external commitments can be met even during difficult periods. The latest mobilisation substantially increases that insurance pool.
This is particularly important at a time when oil prices are high, geopolitical tensions remain elevated and the global dollar environment is still challenging for many emerging markets. By raising dollars before a crisis emerges, India is improving its preparedness rather than reacting after pressure intensifies.
A deterrent against speculation
Currency markets are driven not only by actual flows but also by expectations. When investors believe a central bank possesses ample reserves and significant intervention capacity, aggressive bets against a currency become less attractive. The probability of a successful speculative attack declines because the central bank has greater resources available to stabilise markets.
That psychological effect may ultimately be one of the programme’s most valuable contributions. The mobilisation sends a clear signal that India has access to large quantities of foreign currency and can continue to add to its buffers rapidly when required. That improves confidence among investors, lenders and rating agencies. In many cases, deterrence itself becomes a form of defence. Markets are less likely to test a central bank that appears well supplied with ammunition.
Lower-cost foreign funding for banks and companies
The programme is not limited to NRI deposits. Special windows for overseas foreign-currency borrowings and external commercial borrowings have also contributed billions of dollars. These facilities allow banks and companies to raise money abroad while reducing uncertainty around currency risk through RBI-supported swap arrangements.
For many borrowers, exchange-rate volatility is the biggest obstacle to tapping international capital markets. A foreign loan may initially appear cheaper than domestic funding but can become expensive if the rupee weakens sharply. The RBI’s framework reduces part of that uncertainty. As a result, overseas borrowing becomes more predictable and potentially more attractive. Over time, that can broaden India’s access to international pools of capital and reduce pressure on domestic funding markets.
The hidden future cost
The inflows are substantial but they are not free money. FCNR(B) deposits are liabilities that must eventually be repaid. When the deposits mature after three to five years, banks will need to return dollars along with interest. The RBI’s swap arrangements will also reverse. That means today’s reserve accumulation creates future obligations.
Some economists estimate that the eventual dollar outflow could be significantly larger than the principal amount raised because interest costs accumulate over time. Managing those maturities smoothly will become an important challenge for policymakers several years from now.
However, the RBI is effectively making a trade-off. It is accepting future repayment obligations in exchange for stronger external resilience today.
More dollars, not necessarily a stronger rupee
The record mobilisation has been widely interpreted as a currency-support measure. In reality, it is better understood as a balance-sheet strengthening exercise. The dollars are boosting reserves, expanding policy flexibility and improving confidence in India’s external position. They are giving the RBI more room to manage volatility without depleting existing reserves. They are also creating a larger cushion against oil shocks, capital outflows and global financial turbulence.
None of that automatically translates into a stronger rupee. Exchange rates remain heavily influenced by crude oil prices, capital flows, global interest rates and the strength of the US dollar.
What India has gained is not a dramatically stronger currency. It has gained something arguably more valuable, which is a much larger stockpile of foreign-currency resources and greater protection against external shocks. In an uncertain global environment, that may prove to be the more important achievement.