India has successfully attracted a record $136.38 billion in foreign currency inflows through a special program initiated by the Reserve Bank of India (RBI). This influx, which significantly exceeded the central bank's initial estimate of $80 billion, provides substantial firepower to defend the rupee against external pressures. The bulk of these inflows, specifically $127.23 billion, came from Foreign Currency Non-Resident (FCNR-B) deposits raised from the Indian diaspora. An additional $9.15 billion was garnered from overseas foreign-currency debt and external commercial borrowings.
The special forex facility, introduced in June, aimed to strengthen India's external position amidst pressures from higher oil prices. The FCNR-B deposit window, originally slated to close at the end of September, was proactively closed on August 31 due to the overwhelming response. This massive mobilization, which included $3.89 billion from external commercial borrowings and $5.26 billion from overseas foreign currency borrowings, has given the RBI a larger cushion to manage rupee volatility and potential shocks.
The scale of these inflows has also impacted domestic financial markets. Interest rates on certificates of deposit (CDs) for short-term funds have notably decreased. For instance, three-month CD rates fell to around 6.30% at the end of August from approximately 7.30% at the end of March, a decline of about 100 basis points. Banking system liquidity also surged to $6.65 trillion on August 31, reaching its highest level since May 2022.
Analysts have reacted positively to the news. Vivek Rajpal, Asia strategist at JB Drax Honore (UK), noted that the inflows were "clearly larger than expectations," providing comfort to the RBI regarding currency management and volatility. This success revives a strategy previously used during the 2013 taper tantrum, when a similar initiative attracted about $26 billion. The significant inflows have also contributed to India's foreign exchange reserves climbing to a record $729.33 billion by August 21.
While the scheme has bolstered the rupee, the substantial inflows could lead to excess rupee liquidity in the financial system. Siddharth Kothari, an economist at Sunidhi Securities, suggested that the RBI might need to sterilize this liquidity through measures such as adjustments to the incremental cash reserve ratio (ICRR) and cash reserve ratio (CRR). The swap facility for external commercial borrowings and overseas foreign-currency loans will remain open until December 31, 2026, offering continued avenues for foreign currency attraction.
