By Saumitra Bhaduri and Shubham Anand

A country can defend its currency in two ways. It can earn more dollars or it can borrow them. The two look alike when the money arrives, but they are not the same. India’s latest external-sector stabilisation largely falls into the second kind.

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Between June 8 and August 13, banks mobilised $52.3 billion in foreign-currency inflows under the RBI’s special swap facility, with FCNR(B) deposits accounting for the bulk of the funds raised. The RBI has closed the FCNR(B) swap window a month earlier than originally scheduled. At a time when the rupee was under pressure, this has been read as a vote of confidence. However, the question is why the money needed such inducement or recorded such a sharp fall as soon as it was withdrawn.

Because confidence had left. The rupee was Asia’s worst-performing currency in 2025-26. Foreign portfolio investors had pulled out billions. They turned net buyers in July, bringing in about $2.1 billion. However, that is still a modest reversal relative to the scale of the preceding exodus. It is too early to read this as investors rediscovering India.

The question is why this works when reassurance does not. Because currency markets move not only on fundamentals but on expectations. Once investors believe depreciation is one-way, good data stops persuading them. The way to break that loop is to make the bet against the rupee expensive. That is what the FCNR(B) window does.

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FCNR(B) deposits let non-resident Indians hold foreign currency with Indian banks, free of rupee risk, with tax-free interest and full repatriation. Banks raise fresh three-to-five-year deposits, swap the dollars with the RBI, and the central bank absorbs the hedging cost. Once that cost is lifted, banks can offer dollar rates near 6-7.5 per cent, and some add leverage of 9-19 times. For a wealthy depositor borrowing abroad and placing the proceeds here at a protected high yield, this is a carry trade with the currency risk removed by someone else.

Who is that “someone else”? That is the question the enthusiasm skips. The pace of mobilisation measures the incentive more than belief in Indian assets. Flows surged only after the subsidy appeared. Confidence that materialises only after the price is raised is not confidence. It is a purchase.

So, what has India bought? Time, and a quiet transfer of risk.

To be fair, the fundamentals are not in crisis. Reserves are large, services exports and remittances cushion the account, and part of the rupee’s weakness reflects the strong dollar. But being out of crisis is not the same as being secure. India slipped into a current-account deficit in May. Against that backdrop, the surge in FCNR(B) deposits is best viewed as a balance-of-payments stabiliser rather than a durable source of dollars. They are ultimately a form of external borrowing and create future repayment and rollover obligations.

Here is the part that deserves more attention. The scheme does not make the rupee’s risk disappear. It relocates it. When the RBI absorbs hedging costs, the exposure moves onto the public balance sheet. When banks raise three-to-five-year money and lend against it, the risk resurfaces as an asset-liability mismatch. A visible currency problem today can become a less visible banking problem tomorrow.

There is a further reason not to relax: These deposits will mature. Every dollar arriving now must be repaid in three to five years.

What should India do with a window it has paid to open? Treat it as a purchased pause, and spend it well.

The RBI deserves credit for acting decisively.

But, if India earns too few dollars, no better way of borrowing will solve it. The answer lies in building export-surplus sectors, attracting FDI, cutting energy import dependence, and treating tourism as a foreign-exchange industry.

The FCNR(B) surge proves India can summon diaspora dollars quickly when needed. However, it also shows that rupee stability increasingly rests on liabilities the country has paid to attract and must one day repay.

Bhaduri is professor, Madras School of Economics, and Anand is PhD scholar, MSE