The Reserve Bank of India’s decision to impose another round of foreign-exchange restrictions, barely a month after completing a massive dollar mobilisation programme, raises questions about the durability of its currency-management strategy. Having mobilised nearly $143 billion through foreign-currency deposits and external borrowings, the central bank is again resorting to administrative restrictions, higher costs on derivative positions and tighter banking-system liquidity to contain pressure on the rupee.

The measures resemble defensive interventions deployed during the Asian financial crisis of 1997–98, the rupee slump of 2011–12 and the taper tantrum of 2013. They may contain volatility temporarily, but their reappearance is difficult to reconcile with the narrative of an economy growing at around 8%, supported by substantial foreign-exchange reserves and strong macroeconomic fundamentals.

The more important question is why extraordinary measures have become necessary so soon after an unprecedented mobilisation of foreign-currency liabilities.

Return to Controls
The RBI’s latest package combines direct intervention in commercial dollar demand with restrictions on currency derivatives and tighter liquidity conditions. From October 12, the central bank will meet the entire daily dollar requirements of three public-sector oil marketing companies, removing their demand from the interbank market.

The RBI has prohibited rebooking cancelled rupee-linked derivative contracts and reduced the threshold for transactions without underlying exposure from $100 million to $5 million. Additional documentation requirements seek to prevent multiple hedging of the same exposure.

More consequential is the Foreign Exchange Risk Reserve, requiring authorised dealers to maintain a 20% reserve against rupee-linked derivative contracts exceeding $2 million equivalent. This raises the funding cost of currency positions, but also makes legitimate corporate hedging more expensive.

The increase in the daily minimum cash reserve ratio maintenance requirement from 90% to 99%, effective October 16, further restricts banks’ liquidity flexibility. Together with open market sales of government securities and variable rate reverse repo auctions, these measures indicate deliberate tightening of financial conditions.

Such restrictions have historical precedents. They can moderate speculative activity, but cannot eliminate underlying dollar demand. Over time, higher hedging costs and diminished market depth can shift trading offshore, weaken price discovery and discourage foreign investment.

Borrowed Reserves
The timing is particularly revealing because the RBI has just undertaken an extraordinary mobilisation of foreign-currency liabilities.

The swap programme attracted approximately $143 billion, including $133 billion of FCNR(B) deposits between June and August at an estimated cost of around 11%, with the RBI funding forward cover. The programme also included partial subventions on $5.3 billion of public-sector external commercial borrowings.

Yet foreign-currency assets increased from approximately $544 billion to a peak of $648 billion on September 4, an addition of $104 billion against mobilisation of about $140 billion. The difference suggests an underlying shortfall of roughly $35 billion, although valuation effects also influence reserve movements.

Since that peak, foreign-currency assets have fallen to $604.7 billion. Compared with March 2026, the increase amounts to only $54 billion against $143 billion mobilised, leaving a gap of approximately $90 billion, including valuation losses.

This is consistent with the deterioration in the balance of payments. Foreign-exchange reserves declined by $22 billion in April–June 2026–27, comprising an $8.1 billion balance-of-payments deficit and $14.4 billion of valuation losses.

Foreign-currency deposits and external borrowings strengthen the immediate availability of dollars, but create liabilities that must eventually be serviced or repaid. They cannot substitute for durable foreign investment or improved export competitiveness. At the recent pace of reserve depletion, the additional buffer could be substantially eroded by the final quarter of 2026–27, leaving India servicing expensive foreign-currency liabilities without a corresponding improvement in its external position.

The renewed weakness in foreign investment compounds the problem. Net portfolio outflows reached approximately $10 billion during September and the first eight days of October.

Narrowing Options
Foreign-currency assets of about $604 billion provide approximately 7.6 months of import cover, assuming monthly imports of $80 billion. Total reserves of $734 billion provide 9.2 months, below the longer-term average of approximately 11 months.

Crude oil above $100 per barrel, geopolitical disruptions and rising global interest rates are adding to external pressures. Without aggressive intervention, the rupee could already have crossed 100 against the dollar. If foreign-currency assets continue declining at the recent pace, that level could be tested soon.

These pressures also narrow the RBI’s monetary policy choices. While the central bank expects inflation to peak around 6% in October–December, our estimate is 6–7%, considering elevated inflation expectations, rising global rates and substantial raw-material cost inflation. This strengthens the case for further repo-rate increases, potentially taking the terminal rate to 6.5% or higher over the next two to three quarters.

Higher interest rates and currency depreciation also threaten equity valuations and corporate earnings. The 10-year government bond yield, already around 7.24%, could move above 7.5%, while banks face rising funding costs and manufacturers contend with pressure on margins.

The experience of 2013 is instructive. The RBI’s $35 billion FCNR(B) mobilisation and accompanying controls helped the rupee recover by around 10%. Yet the currency has depreciated by more than 90% since 2012. Temporary stabilisation did not alter its longer-term trajectory.

India needs stronger private investment, manufacturing and export competitiveness, better-quality capital inflows and greater exchange-rate flexibility. Without these adjustments, the RBI risks repeatedly deploying restrictive measures to manage pressures originating outside the currency market.

The $143 billion mobilisation was intended to provide stability. The return to currency controls so soon afterwards suggests that the underlying external imbalance remains unresolved. Borrowed reserves can buy time, but cannot indefinitely finance the gap between India's growth ambitions and its capacity to attract sustainable foreign capital.