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Informist, Wednesday, Jun. 10, 2026

 

By Aaryan Khanna

 

– The governor's statement on Friday showed the Reserve Bank of India's intentions for the external sector. The action announced on Monday spoke much louder than Friday's words. Though he may never admit it – and he never did, neither in his statement nor in the post-policy press conference – RBI Governor Sanjay Malhotra was finally in crisis management mode. So far, he seems to be on top of it without saying anything out loud. He read out the six forex accretive measures Friday in an even tone towards the end of his statement without once targeting an amount of inflow. Later, he seemed willing to let the taps overflow without a care as to the cost. After all, economists had predicted India would have a balance of payments hole of over $50 billion if the RBI did nothing but defend the rupee with its foreign exchange reserves, eventually draining them by that amount.

 

Friday, Malhotra said the central bank would bear the full cost of hedging the fresh foreign currency non-resident deposits banks would raise for three to five years until Sept. 30. Effectively, this reduces banks' cost of funding foreign currency deposits by nearly 300 basis points, a cost that will now be borne by the central bank. He also announced a concessional hedging rate for offshore loans from public sector undertakings. Analysts were not convinced the latter window would generate upwards of $10 billion in inflows.

 

The governor's statement, seen substantial on Friday, undersold the actual bazooka that the central bank unleashed when it notified the guidelines for these two measures on Monday.  

 

The RBI Monday provided all the trimmings with the foreign currency deposit scheme – allowing banks to get leveraged deposits, then exempting these funds from the cash reserve ratio and statutory liquidity ratio requirements. This plugged a key mismatch in the regulator's management as high credit-deposit ratios for banks had tightened funding conditions, which are now expected to be alleviated with foreign money seen pouring in through the scheme. Further, foreign currency swaps entered into against these deposits will not count towards banks' net open positions, which are capped at $100 million. 

 

As the asterisks have resolved themselves, banks are now expected to cumulatively raise over $50 billion through these deposits. Foreign currency deposits may start coming in as early as this week, with the only operational hurdle left being that banks have to canvass offshore investors and set up frameworks for the leveraged deposits. Several banks raised deposit rates on foreign currency non-resident deposits in the three-to-five year bucket Wednesday by up to 437 basis points.

 

On Monday, the RBI also fixed a 1.50% per annum hedging cost to incentivise foreign currency borrowing and the scope of the measure was much wider than outlined on Friday. First, the central bank has marked the offshore foreign currency borrowings of authorised dealer banks maturing in over three years eligible for the concessional swap window. Second, the bonds can be raised till December-end, while the RBI governor had said only Sept. 30.

 

Apart from the deposit scheme that banks will run, India may also be able to garner over $20 billion from the concessional borrowing window with large public sector banks, including State Bank of India, widely expected to tap the market, along with state-owned non-bank lenders. The cost of raising foreign currency loans for eligible entities will effectively be 125 basis points lower than prevailing market rates and over 200 bps lower than the peaks in April and May, a steal deal.

 

Until last week, you could have faulted the RBI for being slow and begrudging in acknowledging the problem around India's balance of payments. The acknowledgement came from Governor Malhotra himself and the series of fixes announced will likely secure the funding the RBI needs to apply a battle dressing to its foreign exchange reserves. 

 

The directions reflect both India's need for foreign capital, as well as a flip from the years of careful narrative building by the regulator on India's external strength. The naked appeal for foreign funds reflects a crisis, with the measures coming straight from the Taper Tantrum playbook of 2013. Having tom-tommed its strong economic fundamentals and world-beating growth rate over the past two years to the seemingly deaf ears of foreign investors, the RBI's change of strategy is significant. 

 

As the guidelines stand, success is almost assured – even the staunchest doubters are convinced after Friday that these measures will bring in sizeable foreign capital. The scheme allows banks to raise deposit rates further, should external monetary conditions tighten and lead to rate hikes in developed economies. What the RBI needs to now manage are the risks it has created on its own balance sheet in this defence.  

The RBI has three to five years to make good the short dollar positions it will add to its already heavy portfolio, roughly around $110 billion by the end of May. For now, it has answered the balance of payments issue while ensuring a robust addition to its foreign exchange reserves, which have been spent in defending Asia's weakest currency in 2026 from further depreciation. The free hand to attract inflows adds to the success of the measures but also to the central bank's future burden.

 

One saving grace may be right around the corner. Authorities have cleared hurdles for India's inclusion on the flagship Bloomberg Global Aggregate bond index, which the government favours now. It has exempted foreign portfolio investors from either capital gains or withholding tax on government securities. More government bonds under the fully accessible route, including the long-term 40-year bond, augur well for investor interest. Bloomberg Index Services is expected to announce its decision this month and the accompanying inflows – potentially around $25 billion over the next year – seem like a done deal. This could allow the RBI to liquidate its short forwards. 

 

The central bank's turn to pragmatism is both an acknowledgement of the unsaid crisis and does enough to nip it in the bud. The RBI's actions show that no cost is high enough – at least not yet – for peace of mind on the external account.  End

 

US$1 = INR 95.27

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Avishek Dutta

 

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