The central bank earlier this month offered a concessional swap facility for external commercial borrowings (ECBs) and foreign currency non-resident bank (FCNR[B]) deposits to attract dollar inflows amid a sharp depreciation of the rupee, effectively buying policymakers time at a cost largely borne by the RBI.
The inflows, however, are temporary. As ECBs mature and FCNR(B) deposits come due over the next three to five years, those dollars will need to be repaid, reversing the inflows. By then, India will require either a stronger BoP or a larger stock of foreign exchange reserves to absorb the outflows without putting pressure on the rupee.
Market participants estimate the measures could bring in between $40 billion and $70 billion, providing a window to improve the country’s external position before these liabilities fall due. As things stands, forex reserves of $672 billion are currently adequate to provide import cover for about 11 months, RBI governor Sanjay Malhotra has often said in media interaction.
“India’s foreign exchange reserves need to rise organically, not just on account of banking inflows, to the extent that the RBI can retire this debt three to five years later. BoP is a larger concern because we are in a structurally different world where financial conditions are tight and capital inflows are scarce,” said Dhiraj Nim, economist and FX strategist at ANZ Bank.
“No one knows what the situation will be three years from now. But if it doesn’t change, we will get back to where we were a month ago,” Nim said. India’s BoP 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.
Concerns over sustaining inflows are also linked to structural factors. India 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, market participants said. A further risk stems from currency movements. A weaker rupee would raise the cost of servicing these liabilities, as the dollars mobilised under ECB and FCNR(B) routes become more expensive to repay in rupee terms, increasing the effective cost for the central bank.
Unlike the 2013 episode, when similar measures were introduced during a balance of payments crisis, the current steps are pre-emptive. “If the rupee weakens further over the next few years, the RBI will end up bearing a higher cost. The measures this time versus 2013 are pre-emptive rather than crisisdriven,” said Abhishek Upadhyay, senior economist, fixed income strategy, at ICICI Securities Primary Dealership.
