How the RBI Pulled in $32 Billion in Foreign Capital — And Why the Rupee Is Still Under Pressure

India has attracted nearly $32 billion in foreign capital in little over a month through a series of targeted measures introduced by the Reserve Bank of India (RBI).

The inflows, mobilized largely through Foreign Currency Non-Resident (Bank) or FCNR(B) deposits, have already surpassed the $26 billion collected during the RBI's special FCNR(B) drive in 2013.

The initiative was launched to shore up India's foreign exchange reserves, strengthen the balance of payments and cushion the rupee from mounting external pressures.

However, despite the record inflows, the domestic currency continues to hover near historic lows against the U.S. dollar. Understanding why requires a closer look at how the RBI's strategy works and the challenges it is attempting to address.

Why Did the RBI Step In?

The RBI unveiled the special measures in June after the rupee came under sustained pressure from a combination of global factors. Rising crude oil prices, heightened geopolitical tensions in West Asia and a strengthening U.S. dollar significantly increased demand for dollars in India.

Since the country imports the bulk of its crude oil, oil marketing companies require large quantities of dollars to pay overseas suppliers, adding constant pressure on the domestic currency.

Under normal circumstances, a central bank may respond by raising interest rates to attract foreign capital and support the currency.

However, higher interest rates also increase borrowing costs for households and businesses, slowing investment and economic growth. Rather than tightening monetary policy across the economy, the RBI opted for a targeted intervention designed to attract foreign currency directly without disrupting domestic credit conditions.

Where Did the $32 Billion Come From?

The inflows have come through three principal channels. The largest contribution has been from FCNR(B) deposits, where Non-Resident Indians (NRIs) place fixed deposits in foreign currencies such as the U.S. dollar.

Since the RBI introduced the new incentives, banks have witnessed a sharp increase in these deposits. Alongside this, foreign investors have poured more than $7 billion into Indian government securities following policy changes announced by the RBI in early June.

Additional inflows have also come through External Commercial Borrowings (ECBs) and Overseas Foreign Currency Borrowings (OFCBs), enabling Indian companies and public sector entities to raise funds from international markets.

How Does the FCNR(B) Scheme Work?

FCNR(B) accounts allow NRIs to maintain fixed deposits in foreign currencies instead of rupees, protecting depositors from exchange rate fluctuations.

The challenge lies not with the depositor but with the bank. Once banks receive dollar deposits, they typically need rupees to lend within India.

This exposes them to the risk of currency fluctuations, forcing them to hedge that exposure in the forward market.

Such hedging generally costs banks around 280 to 300 basis points annually, making FCNR(B) deposits relatively expensive to manage and limiting the interest rates banks can offer to NRIs.

To address this constraint, the RBI opened a concessional foreign exchange swap window. Under this arrangement, banks receive dollar deposits from NRIs and immediately swap those dollars with the RBI in exchange for rupees at the prevailing market rate.

Simultaneously, the RBI enters into a forward agreement promising to return the dollars after three to five years at a pre-determined exchange rate.

By effectively absorbing the bulk of the hedging cost, the RBI allows banks to offer considerably higher interest rates—ranging from about 5.5% to 7.1%—making FCNR(B) deposits significantly more attractive. This incentive has triggered a rapid inflow of overseas deposits within weeks of the scheme's launch.

How Do Forex Swaps Strengthen the Rupee?

The forex swap mechanism serves as a bridge between incoming foreign currency and the domestic banking system.

When NRIs deposit dollars with Indian banks, those banks exchange the dollars with the RBI and receive rupees that can be deployed within the domestic economy.

The RBI, meanwhile, adds the dollars to India's foreign exchange reserves while committing to reverse the transaction after the agreed maturity period.

Since banks are insulated from exchange rate risk, they are encouraged to mobilize larger volumes of foreign currency deposits. At the same time, the additional supply of dollars helps ease pressure in the foreign exchange market by increasing the availability of dollars within the financial system.

Why Didn't the RBI Simply Raise interest Rates?

Although increasing policy interest rates is a conventional response to currency depreciation, the RBI concluded that such a move would have imposed unnecessary costs on the broader economy.

The weakness in the rupee has been driven largely by external developments rather than excessive domestic demand.

Raising interest rates would have made home loans, corporate borrowing and consumer credit more expensive, potentially slowing economic activity at a time when the underlying problem lay outside India's borders.

By introducing targeted incentives for foreign currency deposits instead, the RBI sought to address the shortage of dollars directly without disrupting domestic growth.

Why Is the Rupee Still Under Pressure?

Despite attracting record foreign inflows, the rupee remains under strain because several powerful forces continue to offset the additional supply of dollars.

Elevated crude oil prices have compelled Indian refiners to purchase substantial amounts of dollars to finance imports. The U.S. dollar has also remained broadly strong against most global currencies, limiting the impact of country-specific capital inflows.

At the same time, foreign institutional investors have continued to withdraw money from segments of the Indian equity market, offsetting part of the gains from FCNR(B) deposits.

Exporters, anticipating further depreciation in the rupee, have also delayed converting their dollar earnings into rupees, reducing the supply of dollars available in the market.

Meanwhile, the RBI has adopted a measured approach to intervention, choosing to smooth volatility rather than aggressively defend a particular exchange rate in order to preserve its foreign exchange reserves.

Can this strategy work over the long term?

The FCNR(B) swap window is widely regarded as an effective tool for addressing short-term external shocks rather than a permanent solution to currency pressures.

The deposits mobilized under the scheme have maturities of three to five years, after which the RBI will need to unwind the swap arrangements and return the foreign currency to participating banks.

If global financial conditions remain challenging at that stage, refinancing these outflows could present fresh challenges.

The concessional swap facility also carries a financial cost for the RBI, which assumes part of the hedging burden that would otherwise fall on commercial banks.

Over the longer term, the stability of the rupee will continue to depend on broader economic fundamentals, including a manageable current account deficit, sustained foreign direct investment, robust export growth and lower dependence on imported energy.

The RBI's latest intervention demonstrates how a central bank can deploy targeted financial instruments instead of broad monetary tightening to address external pressures.

By encouraging FCNR(B) deposits through concessional forex swaps, the RBI has mobilized record foreign capital, strengthened India's foreign exchange reserves and provided the banking system with greater liquidity.

While the strategy has helped cushion the rupee against immediate external shocks, it cannot by itself overcome structural challenges such as high energy import dependence, persistent global dollar strength and volatile international capital flows.