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Informist, Friday, Jun. 5, 2026

 

By Pratiksha

 

MUMBAI –  The currency market was expecting Reserve Bank of India Governor Sanjay Malhotra to pull a rabbit out of his hat in defence of the weakening rupee at the monetary policy announcement Friday, and he did exactly that. In fact, he surprised the market by pulling out all the rabbits at once. 

 

The governor announced a host of foreign capital measures, which are expected to draw bumper overseas inflows into India and turn the tide in favour of the Indian rupee at a time when it is grappling with its worst crisis in over a decade, market participants said.   

 

"The RBI unveiled a bazooka of measures today. With capital inflows incentivised, the RBI has effectively anchored the exchange rate. This will give importers some comfort and likely lead to increased hedging activity from exporters," Shailendra Jhingan, head of treasury and economic research at ICICI Bank, said. "We expect the rupee to appreciate even past 94 a dollar as these measures come into effect." 

 

Among the various measures, Malhotra announced a facility of concessional foreign exchange swap till Sept. 30 to incentivise external commercial borrowings by public sector undertakings. He also introduced a similar facility for bearing the full hedging cost to banks for raising fresh three-five year foreign currency non-resident deposits till Sept. 30. 

 

The central bank also expanded the universe of government securities under the Fully Accessible Route and removed some limits for non-resident Indians and Overseas Citizens of India in equities. It has also proposed to restore the time for realisation of export proceeds to nine months from 15 months.

 

The cherry on the top was the government exempting foreign institutional investors from paying capital gains tax on investment in government bonds. The government also exempted FIIs from paying any witholding tax on interest on such investments.

 

Together, these measures are likely to draw almost $40 billion-$50 billion worth of foreign inflows into India in the next four-five months, with the rupee expected to rise to almost 93.00 a dollar in the near term, market participants said.  

 

Of the various measures, the window for raising FCNR (B) deposits, a tool last effectively used in 2013, is most likely to attract the biggest – $20 billion-$25 billion – and fastest inflows, dealers said. The external commercial borrowing swap facility for public sector undertakings is likely to draw around $10 billion-$15 billion, they added. 

 

"Announcements around concessional FX swaps for PSU raising ECB and the RBI bearing FNCR(B) hedging cost were quite strong in our view. If these play out as expected, the consequent support to the BoP (balance of payments)  will likely be strong, which we otherwise expect would be in a deficit of over $50 billion," ANZ Banking Group said in a note.

 

However, some market participants flagged that demand for both the FCNR deposit window and external commercial borrowing swap facility may be constrained as global interest rates are still elevated.  

 

Further, the widening of foreign investor access to certain Indian government bonds and the tax exemptions may result in only modest inflows in the near term, they said. However, these measures have led to increased expectations of inclusion of Indian government bonds eligible under the Fully Accessible Route in Bloomberg Index Services Ltd.'s flagship Global Aggregate Index, which if it materialises, will potentially attract passive inflow of $20 billion to $25 billion, likely in FY28. 

 

CHALLENGES LINGER

While the slew of capital inflow measures will help address some of the external financing concerns, it will not resolve the issue of India's structural balance of payments, which has deteriorated sharply over the past year due to large capital outflows, market participants said. 

 

Before the announcement of the measures, economists had pegged balance-of-payments deficit of roughly $35 billion-$40 billion in FY26, with expectations that the deficit may widen further to around $65 billion in FY27. In FY25, there was depletion of $5 billion in foreign exchange reserves on a balance of payments basis. 

 

"We think India requires roughly $7 billion-$8 billion per month in capital inflows to balance the BoP. This is still sizeable, and while the measures may add up to $5 billion per month of incremental inflows over the next few months, it does not fill the gap entirely," Mitul Kotecha, head of Asia FX and rates strategy at Barclays, said in a note. 

 

Some market participants expect the RBI to make the most of the rupee's appreciation and unwind its large, near $100-billion, short forward dollar book, limiting the Indian currency's rise. However, some expect the central bank to come in the way of the rupee's appreciation only if it appreciates above 93 a dollar. "The RBI is likely to allow the positive impact to play through rather than sterilising it by materially reducing its forward book. Market intervention may reduce," Jhingan said. 

 

Market participants also await further details related to the FCNR deposit window and external commercial borrowing swap facility, with some fearing that certain clauses of the framework may make it difficult for NRIs to obtain as much leverage as in 2013. 

 

Further, a sustainable recovery in the domestic currency still needs lower oil prices and a weaker dollar, dealers said, adding that the eventual and long-term support for the rupee still lies in the resolution of the war between the US and Iran, which seems to be far from over for now.  End

 

US$1 = INR 94.95

 

Edited by Avishek Dutta

 

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