India's foreign exchange reserves increased by $9.9 billion to reach $716.9 billion as of August 14, positioning them within striking distance of the record high of $728.5 billion set in February. This surge was primarily due to a $7.2 billion rise in foreign currency assets and a $2.7 billion gain in gold reserves, marking the second consecutive week of significant accumulation and the fastest two-week build-up in recent months.
The Reserve Bank of India (RBI) ended its FCNR(B) dollar mobilization window early due to overwhelming response and strong forex inflows. The scheme, which allows Non-Resident Indians to invest foreign earnings in fixed deposits, attracted $65.4 billion by August 21, with total swap facility inflows reaching $72.8 billion. This rapid accumulation, particularly $13.1 billion in the week leading up to August 21, surpassed initial expectations and contributed significantly to the foreign exchange buffer.
Economists anticipate that despite the early closure of the FCNR(B) window, total forex mobilization, including external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCBs) which remain open until December 31, could reach $90-100 billion. QuantEco Research estimates cumulative flows, inclusive of OFCBs and ECBs, could even touch $85 billion by December, exceeding earlier projections. This strong inflow has reduced the urgency for the RBI to maintain extraordinary support measures, especially with the dollar-rupee stabilizing in the 95-range.
The robust capital inflows have positively impacted India's balance of payments, which recorded a surplus of $2.9 billion in June, a significant turnaround from a deficit in the previous year. Banking capital flows are expected to improve, with Nomura economists Sonal Varma and Aurodeep Nandi estimating FCNR(B) inflows could reach nearly $80 billion. The accelerated deposit growth for Indian banks, from 12% year-on-year in Q1 FY27 to 15.4% year-on-year by the end of July, also indicates the positive impact of these measures on the domestic financial system.
Analysts like Radhika Rao from DBS Bank note that the decision to close the deposit facility early was driven by the "encouraging response" and that the various funding windows have likely raised around $70-75 billion in aggregate, equivalent to 10-12% of prevailing foreign exchange reserves. This provides a crucial counterweight to geopolitical and trade-related risks, reinforcing a positive outlook for India's external sector. The improved outlook for Foreign Institutional Investor (FII) flows is also expected to ease pressure on the rupee in the near term.
