Why Rupee Remains Under Pressure Despite RBI's $41 Bn Forex Drive

Amid rising geopolitical uncertainties, increasing oil market volatility, and risks to growth and inflation, the rupee has borne the brunt of the turmoil. From around ₹92 per US dollar to hitting record lows of nearly ₹96, the crippling impact of geopolitical tensions and India's import dependence has been evident.

Against this backdrop, the Reserve Bank of India (RBI), at its June Monetary Policy Committee (MPC) meeting, announced several measures to support the rupee.

These included a forex swap window for external commercial borrowings (ECBs) by public sector units and the launch of the Foreign Currency Non-Resident (Bank) [FCNR(B)] deposit scheme.

Two months into the schemes, banks have mobilised nearly $36 billion through the FCNR(B) channel, while other special borrowing windows have taken total inflows to nearly $41 billion.

According to initial estimates by the State Bank of India, these schemes were expected to attract as much as $70 billion.

However, more recent estimates suggest total inflows could even reach $100 billion if the current pace of deposit mobilisation continues.

Despite these strong foreign currency inflows, neither the rupee nor India's foreign exchange reserves have reflected their full impact.

Why Did the RBI Launch the Scheme?

At a time when foreign portfolio investors were increasingly pulling money out of the domestic equity market, the RBI's decision to revive the FCNR(B) scheme—last introduced under former Governor Raghuram Rajan—signals policymakers' efforts to attract fresh dollar inflows.

According to reports, the central bank's objective is to build an additional buffer of foreign currency without having to rely solely on its existing forex reserves during periods of market stress.

As of July 31, the RBI said the special facilities had mobilised $40.81 billion. Of this, $36.72 billion came through FCNR(B) deposits, $1.5 billion via the external commercial borrowing swap facility, while overseas foreign currency borrowings by authorised lenders contributed $2.57 billion.

If RBI Mobilised So Many Dollars, Why Haven't Forex Reserves Risen Sharply?

A key question raised by market participants is: If the RBI has mobilised so many dollars, why isn't this fully reflected in the country's foreign exchange reserves? India's forex reserves stood at $682.35 billion for the week ended July 24, up $6.11 billion from $676.24 billion in the previous week.

The answer lies in several factors. First, valuation effects can significantly influence headline reserve numbers.

A stronger US dollar reduces the dollar value of reserve assets denominated in currencies such as the euro and pound sterling, while fluctuations in gold prices also affect reserve valuations.

Second, the RBI may be actively intervening in the domestic spot market by selling dollars to prevent excessive depreciation of the rupee.

Third, the central bank may be settling forward contracts, including the maturity of earlier swap transactions, which requires it to sell dollars that it had purchased during the first leg of those swaps.

If Dollars Are Pouring In, Why Isn't the Rupee Strengthening?

While the inflows appear large on paper, FCNR(B) deposits work differently from conventional foreign exchange inflows.

Instead of being sold directly in the spot market, the dollars mobilised by banks are largely swapped with the RBI under its special forex facility.

As a result, the funds move onto the central bank's balance sheet rather than immediately increasing the supply of dollars available in the market. This limits their direct impact on the rupee's exchange rate.

Moreover, the RBI is not attempting to engineer a stronger rupee. Its objective is to prevent disorderly movements rather than defend a specific exchange rate.

Policymakers appear comfortable with gradual depreciation if it reflects underlying market conditions.

What they seek to avoid is a sharp fall triggered by panic, a shortage of dollar liquidity, speculative attacks on the currency, or a sudden loss of investor confidence.

What Is the RBI Ultimately Trying to Achieve?

The RBI's broader strategy is to strengthen India's external position by diversifying sources of foreign currency and reducing pressure on existing reserves during periods of market stress.

By mobilising dollars before external conditions worsen, the central bank is attempting to build a larger buffer that can be deployed if volatility intensifies.

These inflows are also temporary. FCNR(B) deposits will mature, swap transactions will unwind and foreign currency borrowings will eventually be repaid.

Meanwhile, the rupee will continue to be influenced by crude oil prices, global interest rates, geopolitical developments and investor sentiment.

In that sense, the RBI's latest measures are less about pushing the rupee to a stronger level and more about ensuring that India has sufficient dollar liquidity to navigate an increasingly uncertain global environment.