The rupee’s borrowed breathing space

Borrowing money to stabilize a currency may seem similar to earning dollars, but the two methods differ fundamentally. In India's case, the latest external-sector stabilisation primarily relied on borrowing, rather than earning, foreign currency. Between June 8 and August 13, banks facilitated $52.3 billion in foreign-currency inflows under the Reserve Bank of India's special swap facility, with foreign currency non-resident (BCNR) deposits contributing the majority of the funds raised.

The RBI terminated the FCNR(B) swap window a month earlier than planned. Although this move was perceived as a vote of confidence during the rupee's challenging period, the true reason behind the need for such inducement becomes apparent when the money withdrawal triggers a sharp decline. This is because confidence had already waned.

The rupee had performed poorly among Asia's currencies in 2025-26, attracting foreign portfolio investors' outflows. Although foreign investors turned net buyers in July, bringing in around $2.1 billion, the reversal was still minimal compared to the earlier outflows. While one cannot immediately conclude that investors are rediscovering India, currency markets are influenced not only by fundamentals but also by expectations.

Once investors believe depreciation is irreversible, positive data no longer convinces them. To break this cycle, investors must find the bet against the rupee more expensive. This is precisely what the FCNR(B) window achieves by allowing non-resident Indians to hold foreign currency with Indian banks without facing rupee risk, with tax-free interest and full repatriation.

Banks raise fresh three-to-five-year deposits, swap dollars with the RBI, and the central bank covers the hedging cost. Once this cost is lifted, banks can offer higher dollar rates, sometimes even with a leverage of 9-19 times. The enthusiasm behind the FCNR(B) deposits reflects the incentive more than any belief in Indian assets.

The pace of mobilisation measures the inducement more than confidence. Confidence that emerges only after the price is raised is not genuine confidence; it is a purchase. So, what has India bought? Time, and a quiet transfer of risk. While the fundamentals are not in crisis, with large reserves, services exports, and remittances cushioning the balance of payments, the rupee's weakness is influenced by the strong dollar.

Nonetheless, being out of crisis is not the same as being secure. India's current-account deficit in May raises concerns, indicating that the surge in FCNR(B) deposits should be viewed as a balance-of-payments stabiliser rather than a long-term source of dollars. Ultimately, these deposits represent a form of external borrowing and create future repayment and rollover obligations.

The key issue to consider is that the scheme does not eliminate the rupee's risk; it merely relocates it. By having the RBI absorb hedging costs, the exposure shifts to the public balance sheet. When banks raise three-to-five-year money and lend against it, the risk resurfaces as an asset-liability mismatch. A visible currency problem today could evolve into a less noticeable banking issue tomorrow.

It is crucial to recognize that these deposits will mature, requiring repayment within three to five years. Therefore, rather than relaxing the scheme, India must treat it as a purchased pause and make the most of it. The RBI deserves commendation for acting decisively, yet if India generates insufficient dollars, no better borrowing option will solve the problem.

The answer lies in fostering export-surplus sectors, attracting foreign direct investment (FDI), reducing dependence on energy imports, and treating tourism as a foreign-exchange industry. The surge in FCNR(B) deposits demonstrates India's ability to swiftly mobilise diaspora dollars when needed. However, it also highlights that rupee stability increasingly depends on liabilities that the country borrowed and must repay in the future.