India’s central bank is navigating unprecedented foreign-currency inflows, prompting longer-dated liquidity operations and raising concerns over market stability and policy effectiveness.
The Reserve Bank of India is already being pushed into longer-dated liquidity operations after a record wave of foreign-currency inflows left banks with more cash than the system can easily absorb. By Friday, the central bank had moved beyond its usual short-term mopping-up exercises and announced a 30-day variable-rate reverse repo auction worth ₹7 trillion, with an early exit option for banks, after system liquidity swelled to more than ₹10 trillion on 3 September. The immediate trigger is the success of the RBI’s special dollar swap scheme, which brought in provisional inflows of $136.377 billion by 31 August.
Almost all of that money came through one route. RBI data show FCNR(B) deposits accounted for $127.226 billion, while overseas foreign-currency borrowings contributed $5.26 billion and external commercial borrowings added $3.891 billion. The numbers are still provisional and remain subject to final reporting and reconciliation, but they also show how dramatic the late rush was: the finance ministry had said on 24 August that inflows stood at $73 billion as of 21 August, including $65.4 billion from FCNR(B) deposits alone. Business Standard reported that most of the final mobilisation was concentrated in the five-year bucket.
The scheme itself was designed as a defensive measure when the rupee and reserves were under pressure earlier in the summer. Introduced on 8 June after the RBI’s early-June policy announcements, it gave banks hedging-cost support on fresh three- and five-year FCNR(B) deposits and opened concessional swap windows for certain overseas borrowings. The original closing date for fresh FCNR(B) deposits had been 30 September, but the RBI brought that forward to 31 August after what it called an “encouraging response”. Deposits already mobilised were still allowed to be swapped with the central bank until 11 September, while the ECB and OFCB windows remain open until 31 December.
The scale has stunned even bankers who had expected a strong response. Business Standard said late market expectations had been for roughly $90 billion to $100 billion. One large-bank chief executive told the paper: “It was beyond anyone’s expectation. It shows the confidence of the global financial system in India, because ultimately money has to come to this country.” The comparison with 2013 depends on what is counted. Indian Express said the earlier RBI exercise mobilised about $34 billion across special windows, while Moneycontrol said the FCNR(B) leg alone had brought in nearly $26 billion. Either way, the present haul is far larger. Indian Express also cited SBI Research as estimating the hedging cost at around 15% of the amount raised, a reminder that the scheme’s success comes with a bill.
A substantial share of the money was channelled through GIFT City, underlining how central the offshore hub has become to India’s funding architecture. Financial Express reported that international banking units there facilitated about $53 billion of the FCNR(B) total, or roughly 42%. Business Standard added that public sector banks had sanctioned $54.02 billion of loans through IFSC banking units by 31 August and had already disbursed $52.8 billion. It also said ECB disbursements through IFSC units totalled $11.62 billion between April and August, while Indian banks raised $11.12 billion through bond issuance on IFSC exchanges.
That success has created a policy problem almost as large as the inflows themselves. Because the dollars were swapped with the RBI, rupees were released into the banking system in return, driving liquidity to an all-time high. Reuters, in a report carried by the Economic Times, said the surplus hit ₹9.70 trillion on 3 September, before later estimates put it above ₹10 trillion. That matters because persistent excess cash can drag short-term money-market rates below the RBI’s operating target, weaken the transmission of monetary policy and, if left in place, risk feeding inflationary pressure. It is also not evenly spread, because the biggest beneficiaries of FCNR(B) mobilisation were a relatively small group of banks.
The menu of possible responses is wide, but none of it is painless. Reuters said the RBI could lengthen variable-rate reverse repo operations, use shorter-tenor sell-buy foreign-exchange swaps, revive the market stabilisation scheme or fall back on a cash reserve ratio increase or open-market bond sales. The current CRR is 3%, and market estimates cited by Reuters suggest a 50 basis-point rise would drain about ₹1.4 trillion, while a 100 basis-point move could remove roughly ₹2.8 trillion. Yet a CRR increase would hit banks that did not benefit from the subsidised mobilisation, while a market stabilisation scheme would shift the interest cost to the government. Reuters also noted that the RBI has about $32 billion of forward dollar positions maturing within one year, giving it some room to manage liquidity through the foreign-exchange book. Even the latest longer-dated reverse repo has drawn scepticism from some market participants, who argue that allowing early withdrawals reduces the central bank’s control over how long liquidity is truly locked away.
For now, the RBI has bought itself a much bigger foreign-exchange buffer, but it has also inherited a longer-running sterilisation task. With the ECB and OFCB channels still open until 31 December, more inflows may yet arrive even after the FCNR(B) window has shut. The final total may also change once the provisional figures are reconciled. What looked in June like a campaign to steady the rupee has, by early September, become a test of whether the RBI can drain surplus cash without bruising the bond market, distorting bank incentives or dulling its own policy signals.
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