RBI Leans on FDI, Trade Deals as Rupee Tests Record Lows

Reserve Bank of India Governor Sanjay Malhotra is increasingly framing India’s external financing strategy around the durability of flows rather than their immediacy, placing foreign direct investment and trade integration at the centre even as the rupee has tested fresh lows and portfolio outflows persist.

The currency’s slide to 95.33 per dollar, before closing at 94.92, has come alongside pressure from elevated oil prices and equity outflows, signalling that near-term balance of payments dynamics remain under strain. 

In his Amsterdam remarks, Malhotra emphasised that foreign exchange reserves remain comfortable, with around 11 months of import cover, and that the current account deficit remains sustainable despite risks from higher energy prices. The offset, in his formulation, lies in the expanding network of trade agreements and a steady pipeline of greenfield investments, particularly in finance and technology, which are expected to support both trade flows and the capital account over time.

Flow Preference
It appears that Malhotra has a clear hierarchy for capital flows.

Portfolio capital is treated as episodic and responsive to relative returns, while foreign direct investment is seen as embedded in capacity creation and supply chains, and therefore more durable. The same framing runs through the monetary policy statement, which flags risks to the current account from global uncertainties and energy prices, but places weight on trade agreements to widen market access and integrate India more deeply into global value chains.

Also Read: RBI Reframes Signals from Capital Flows

That preference also explains the emphasis on improving the composition of capital flows rather than their aggregate size. Gross FDI has strengthened, and net FDI has improved, even as portfolio flows have turned negative, reinforcing the RBI’s view that the quality of inflows is shifting even if headline flows remain volatile.

Malhotra also indicated that the recent correction in equity valuations could slow foreign portfolio investment repatriations, which, if sustained, would ease pressure on the net capital account.

While FDI and trade agreements operate with a lag, a moderation in portfolio outflows could provide some near-term relief without materially altering the broader adjustment path.

Market Friction
The tension lies in that timing.

Trade agreements expand capacity and market access over multiple quarters, and FDI responds to policy credibility and growth prospects over longer horizons. The currency, however, adjusts in real time to oil prices, global risk appetite and capital flows.

The recent depreciation of the rupee reflects a mismatch between near-term pressures, such as portfolio outflows and a higher import bill, and the gradual improvement in structural inflows, creating a divergence between immediate stress and medium-term expectations.

The RBI’s approach appears to be to allow the exchange rate to absorb part of that adjustment, while relying on reserves and the evolving composition of inflows to maintain overall stability. With foreign exchange reserves at about $697 billion, the buffer is adequate but not intended to fully offset underlying pressures.

The consistency of Malhotra’s messaging suggests that this is not a tactical response but a deliberate shift. The objective is to reduce dependence on volatile portfolio flows and anchor the external account in trade integration and long-duration capital.

How smoothly that transition plays out will depend not only on whether portfolio outflows moderate and whether FDI and trade linkages scale up, but also on how markets interpret the RBI’s apparent willingness to lean away from portfolio inflows as a financing lever, raising the possibility that there may be no active policy push to attract such flows even as near-term pressures on the rupee persist.