RBI Has Bought Time; India Must Now Earn Its Dollars

The Reserve Bank of India’s June foreign-currency package worked faster than many expected. By July 31, close to $41 billion had been mobilised under its three dollar-inflow schemes, mostly through FCNR(B) deposits. The inflows have strengthened India’s near-term financing position and given the RBI more room to manage a challenging external environment.

That operational success should not obscure the harder question. Why did an economy growing at more than 7% need the central bank to absorb much of the market’s hedging cost and subsidise three-to-five-year dollar funding?

The answer goes beyond an oil shock or speculative pressure. India’s problem was not an unfinanceable current account deficit. Rather, private capital inflows had weakened to the point that even a modest current account gap resulted in an overall balance-of-payments deficit and a drawdown of foreign-exchange reserves. In effect, the RBI has used its balance sheet to supplement weaker private capital inflows and absorb part of the market cost of hedging.

The central bank has bought time.

The task now is to use that window to restore competitiveness rather than merely postpone the next call for dollars.

Real Growth, Nominal Strain
The provisional national accounts show real GDP expanding 7.7% in 2025–26, yet nominal GDP grew only 8.9%. That implies an economy-wide GDP deflator of just 1.1%.

Low inflation can raise real incomes and allow lower interest rates. But unusually weak nominal growth becomes a concern when equity valuations already discount strong future earnings and corporate pricing power remains uneven.

Debt servicing, wages, profits and tax revenues depend on nominal cash flows, not real GDP. Global investors buy prospective earnings, not GDP releases.

They also face a translation problem.

A company delivering respectable rupee earnings growth may generate little dollar return after currency depreciation. India can remain one of the fastest-growing major economies while becoming less compelling to investors comparing earnings, valuations, liquidity and currency risk across markets.

The June 5 package must be understood against that background.

Capital’s New Destination
Global capital has not disappeared; it has found a powerful new destination. According to an OECD analysis, artificial-intelligence companies captured 61% of worldwide venture-capital investment in 2025. US-based firms attracted about 75% of global AI venture funding.

The same concentration is evident in direct investment.

AI infrastructure, semiconductors, critical minerals and energy-transition industries accounted for 44% of the value of announced global greenfield investment projects in 2025, up from 16% in 2020. UN Trade and Development estimates that announced data-centre projects exceeded $270 billion, representing more than one-fifth of worldwide greenfield projects.

The Economic Survey 2025–26 itself noted that foreign portfolio investment had remained subdued partly because investors increasingly favoured  AI-related opportunities in the US, Taiwan and South Korea.

India has a large domestic market, abundant engineering talent and rapidly expanding data-centre capacity. Yet it lacks the depth of investible opportunities in semiconductors, advanced computing and AI platforms available elsewhere.

Its listed technology champions continue to be valued primarily as services exporters, forcing India to compete not only with other emerging markets for generic allocations but also with the world’s concentrated technology investment cycle.

Carry Is Not Enough
The external financing environment has become less forgiving. The RBI’s policy rate is 5.25%, while the US Federal Reserve’s target range is 3.50–3.75%. That leaves a policy-rate differential of only 150–175 basis points before accounting for taxes, hedging costs, liquidity conditions and possible rupee depreciation.

The benchmark Indian 10-year government bond yield was 6.84% on August 3, compared with 4.68% for the US 10-year Treasury note yield, a spread of around 215 basis points.

A modest depreciation of the rupee can eliminate an entire year’s unhedged carry. Fully hedging the exposure absorbs much of the nominal yield advantage.

The Indian debt market can therefore no longer depend on carry alone to attract foreign investors. It must offer credible inflation management, currency stability, liquidity and confidence in the broader policy framework.

Persistent US inflation may erode the dollar’s purchasing power, but it can also keep Federal Reserve policy rates and US bond yields elevated, tightening global financial conditions. That does not necessarily redirect capital towards India.

Investors seeking protection have alternatives: gold, commodities, infrastructure, inflation-linked securities or companies controlling scarce technology and computing capacity. A higher-for-longer US rate environment makes sustained carry-driven inflows into India more difficult.

India must compete on productivity, profitability, institutional credibility and the quality of its investible assets. It still has to earn the allocation.

A Financing-Account Warning
The full-year balance-of-payments data released on June 8 expose India’s external vulnerability. The current account deficit in 2025–26 was at $25.2 billion, or 0.6% of GDP. Strong services exports and remittances offset much of a $337.3 billion merchandise trade deficit. Yet net FDI was only $6.9 billion, foreign portfolio investment recorded a net outflow of $16.4 billion, and foreign-exchange reserves declined by $23.6 billion on a balance-of-payments basis.

This is not the profile of a conventional current account crisis. It is a warning from the financing account. Gross investment announcements and headline FDI inflows are not enough. What ultimately finances the balance of payments is the capital that remains after repatriation, disinvestment and outward investment.

In 2025–26, normal capital inflows were insufficient to prevent an overall balance-of-payments deficit and reserve drawdown despite the modest current account gap.

The counterfactual is more nuanced than simply subtracting nearly $41 billion from the balance of payments. Some FCNR(B) deposits may reflect eligible renewals or rebookings rather than genuinely incremental inflows. The RBI has said it has seen no evidence that rebooking accounts for a significant share of the mobilisation. Some inflows may also have replaced other borrowing, financed external payments or enabled the RBI to reduce forward liabilities rather than simply augmenting headline reserves.

Even after those qualifications, the conclusion is clear. Without the package, reserve depletion would probably have been greater, the rupee adjustment sharper and domestic financial conditions tighter.

A disorderly exchange-rate move can become self-reinforcing when oil prices are volatile and large forward obligations are approaching maturity. The RBI was right to prevent liquidity stress from escalating into a confidence shock.

The Price of Borrowed Calm
These dollars are liabilities, not free reserves. FCNR(B) deposits are obligations of banks to non-resident depositors. Under the new arrangement, banks sell the principal amount in dollars to the RBI at the FBIL reference rate and buy them back at maturity at the same rate.

The facility provides only a principal hedge. Banks remain responsible for paying interest on the deposits in foreign currency. The RBI has said the corresponding foreign-currency assets are invested overseas, meaning it does not necessarily assume an unhedged principal currency position.

For eligible public-sector external commercial borrowings and banks’ overseas borrowings, the swap is priced at 1.5% a year, for up to five years, well below prevailing market hedging costs.

The subsidy is therefore explicit.

The economic concession, however, is not simply a one-for-one currency loss. It consists of the market-equivalent forward premium that the RBI does not charge, together with any rupee-liquidity, sterilisation and balance-sheet opportunity costs, net of the income earned on the foreign assets. Rupee depreciation alone does not imply an accounting loss because the rupee value of those foreign assets also rises.

Any net cost may ultimately appear as lower RBI income, a smaller future surplus transfer to the government or reduced balance-sheet buffers. In economic terms, part of the cost of hedging has shifted from private balance sheets to the public balance sheet.

There is a defensible case for accepting such a cost when financial stability is at stake. But it should be measured and disclosed.

The RBI should publish the notional amount, maturity profile, methodology used to value the concession, rupee-liquidity implications and aggregate balance-sheet exposure. Greater transparency would reinforce that this is a temporary stability operation rather than a permanent public guarantee for foreign-currency funding.

Economists believe the RBI likely used part of the inflows to reduce its record $104.5 billion net short-dollar forward position at the end of June. Short-dollar forward position maturing within three months has reduced to almost $16 billion at June-end from around $29 billion a month ago.

Such a strategy would be prudent. It would exchange short-dated pressure for longer-dated funding while restoring the RBI’s capacity to intervene in the foreign-exchange market. More importantly, it would underline the true nature of the exercise: India is extending the maturity of its external financing, not eliminating the underlying liability.

That is the point at which the burden shifts from the central bank to economic policy. The RBI can improve the timing and composition of external financing, but it cannot alter the underlying terms on which India attracts capital and earns foreign exchange.

The true test of the reprieve is whether India can raise export earnings, improve returns on private investment and retain a larger share of the capital it attracts before these liabilities mature.

What can India do?

First, Restore Confidence
India could begin by removing obstacles that require little new legislation but much greater administrative discipline.

Tax disputes affecting large investments should be resolved within prescribed timelines. Industrial and environmental approvals should be subject to enforceable deadlines. Customs classifications and tariff changes must become more predictable, with commercially significant disputes fast-tracked through dedicated tribunals or arbitration.

The government should also publish a credible two-year pipeline of assets and public-sector companies earmarked for monetisation, privatisation or strategic sale. Investors need to distinguish between broad statements of intent and transactions genuinely being prepared for the market.

These are not headline-grabbing reforms. But capital rewards execution, predictability and the reliable enforcement of contracts. Visible administrative progress would also build credibility for politically more difficult reforms.

Rebuild Private Investment
The priority must shift to private capital formation.

That requires faster insolvency resolution, a credible privatisation programme outside strategic sectors, deeper corporate bond markets, lower logistics costs and stable regulation in sectors such as energy, telecommunications, mining, financial services and digital infrastructure. Public capital expenditure has sustained investment, but it cannot permanently substitute for private risk-taking.

India should also deepen domestic capital markets so investment becomes less dependent on swings in global risk appetite. Greater liquidity in corporate bonds, a broader investor base for infrastructure and real estate investment trusts, a viable municipal bond market, and prudent participation by pension and insurance funds in long-duration infrastructure assets would help channel domestic savings into productive investment.

The objective is not to displace foreign capital but to ensure domestic growth is not held hostage to it.

Own More of the Technology Cycle
India needs an investible technology strategy, not merely widespread AI adoption.

Its opportunity spans reliable electricity, transmission networks, data centres, cloud infrastructure, semiconductor design and packaging, industrial automation, research capability and India-specific AI applications.

Over the next year, the government should identify infrastructure zones capable of guaranteeing reliable power, water, land and transmission connectivity for large data-centre and computing projects. Approvals within these zones should follow a single, enforceable timeline rather than multiple sequential clearances.

Semiconductor policy should focus on commercial segments such as design, advanced packaging, testing, power electronics and selected compound semiconductors. Government procurement can create early demand, but incentives should remain linked to export competitiveness, domestic supplier development and measurable technology transfer.

India’s AI strategy must produce domestic suppliers, globally competitive companies and exportable technologies, not merely larger import bills for chips, cloud services and AI models.

Earn More Dollars
Trade policy should now place export competitiveness ahead of indiscriminate protection.

Within the next year, the government should publish a stable three-year tariff schedule for critical intermediate and capital goods, limiting unexpected changes except under clearly defined safeguard provisions. For exporters, predictability matters as much as tariff levels.

Customs administration should move further towards risk-based clearance and post-clearance audits, supported by enforceable clearance timelines for compliant importers. Tax refunds and duty-remission claims should be settled within fixed periods so exporters are not forced to finance the state through delayed receivables.

Trade agreements must also become usable in practice. Lower partner-country tariffs will matter little if Indian firms cannot satisfy rules of origin requirements, certification standards or domestic customs procedures. Success should be measured by utilisation rates, not by the number of agreements signed.

Measure the Capital That Stays
Investment performance also needs better measurement.

Large headline FDI announcements say little about external sustainability. What matters is net FDI after repatriation, disinvestment and outward investment. Beginning next financial year, the government should publish an annual Net FDI Scorecard, separating fresh equity inflows, reinvested earnings, repatriation, disinvestment, outward investment and completed greenfield capacity.

It should also distinguish between announced investment, capital actually invested and projects that have entered production.

Such a scorecard would identify sectors where gross inflows remain strong, but capital retention is weak. Policymakers could then determine whether capital is leaving because of normal profit repatriation, poor project economics, regulatory uncertainty, tax disputes or weak exit mechanisms.

The IMF’s 2025 Article IV consultation linked stronger long-term growth to improvements in the business environment, deeper trade integration, stronger human capital, higher female labour-force participation, and greater research and innovation. Those are the institutional foundations on which long-term foreign investors ultimately price India’s risk.

The Cost of Delay
Failure to use this reform window would not necessarily produce another 1991-style crisis. The more likely outcome is a weaker equilibrium.

India would face recurring balance-of-payments deficits, greater reliance on debt-creating inflows, periodic pressure on the rupee and a higher risk premium demanded by foreign investors. Currency weakness would erode dollar returns, weaker inflows would put further pressure on reserves, and the RBI would face repeated demands to absorb hedging or liquidity risks.

The danger is not a dramatic crisis. It is an economy that continues to grow, but below its potential, while becoming progressively more constrained by the cost of external financing.

By the time today’s liabilities mature, India should have built stronger export earnings, higher retained FDI, more productive private investment and a broader domestic capital base.

The Clock Is Running
The June 5 package has achieved what a central-bank bridge is meant to achieve. It has probably reduced the risk of a disorderly adjustment in the rupee, strengthened the near-term external financing position and created valuable policy space. The RBI appears to have acted before market stress evolved into a broader confidence event.

But three-to-five-year funding eventually has to be repaid.

The first year should be used to restore confidence. The next should rebuild private investment, deepen domestic capital markets and strengthen export competitiveness. By the time these liabilities mature, India should have stronger net FDI, greater technological capability and far less dependence on borrowed dollars.

Ultimately, the June package will be judged not by how many dollars it mobilised in 2026, but by how few India needs when those liabilities fall due.

That is no longer principally a question for the RBI. It is a question for economic policy.