Monetary policy implications of augmenting forex resources

Prompted by geopolitical risks – the Russia-Ukraine war, the Hamas-Israel conflict, tariff wars, the slow fructification of new trade pacts, polarization and the creation of new trade blocs, and the Venezuelan crisis – the global economic landscape is mired in intense geopolitical risks, elevated by the West Asia crisis. The government and central banks are increasingly facing the challenges of an economic slowdown and a surge in inflation, which are disrupting the policy rate trajectory.

Against the backdrop of interconnected and collateral risks leading to elevated energy prices, increased transportation and insurance costs, and supply-side disruptions that heighten supply chain risks, the external sector has become more vulnerable.

As a result, during FY25–26, the Indian Rupee (INR) depreciated by roughly 8.45% to 10.96% against the US Dollar (USD). The INR was at Rs. 85.53 per USD in March 2025, which fell to a low of Rs. 94.71–97.00 per USD by March 2026. This occurred despite the RBI selling $53.1 billion in the spot market during the financial year to ensure the currency’s orderly movement. Among causative factors, FPI outflows since January 2026 have totaled US$13.7 billion, primarily in the equity segment, thereby hastening the depreciation of the INR.

The depreciating INR and depleting forex reserves, which fell from an all-time high of US$ 728.494 billion in the week ending February 27, 2026, to US$ 682.321 billion by the end of May, led the RBI to shift its focus of Monetary Policy – June 5, 2026, to augmenting foreign capital by exploring the following non-traditional avenues.

1. G-Sec market liberalization:

RBI liberalized foreign investment in government securities under the Fully Accessible Route (FAR). It expanded the universe of Indian bonds accessible to global fixed-income investors — particularly long-duration investors such as pension funds, sovereign wealth funds, and insurance companies that require very long-dated bonds — by including all new issuances of 15-, 30-, and 40-year-tenor G-secs in its eligibility criteria. In addition, limits on short-term investment, concentration limits, and individual securities for FPI investment under the General Route are being removed.

These measures, along with the tax benefits provided by the government, should attract foreign capital for government borrowing. The removal of concentration limits and individual security-wise limits for FPIs in the General Route further reduces friction for large institutional investors — who previously had to manage complex limit headroom across multiple securities — thereby simplifying their participation in the India debt market.

If FPIs can access Indian bonds at a lower tax cost, the risk-adjusted yield improves, making India more competitive in global bond allocation, expected to attract a durable inflow of US$10–15 billion from long-duration institutional investors in the next 12–18 months.

2. NRI/OCI Investment Norms:

The limits for investment by NRIs and OCIs in equity instruments traded on the stock market without SEBI registration are being increased. Further, the same facility is being extended to all individual Persons Resident Outside India (PROIs), on par with NRIs and OCIs, in conjunction with the government’s move to make the country’s debt market more attractive through tax exemptions for foreign investors investing in Indian bonds. India’s 32 million-strong diaspora historically demonstrates home-country bias — maintaining India investments even when institutional FPIs are selling. The measure can increase NRI participation in the Indian debt market.

3. Swap costs against PSU ECBs:

RBI also provided a facility for concessional forex swaps until September 30, 2026, to incentivize PSUs to issue ECBs to borrow directly from international markets — generating foreign-currency inflows that supplement India’s forex reserves. PSUs — oil companies, infrastructure entities, power generators — have large, ongoing capital requirements that can be met through international borrowing. The concessional forex swap facility effectively subsidizes hedging costs for PSU ECBs — reducing the all-in cost of foreign-currency borrowing for public-sector entities and incentivizing them to access international capital markets rather than domestic rupee markets. It can also enable banks to diversify their lending to other productive sectors of the economy.

PSU ECBs typically run at $8–12 billion annually. With concessional swap incentives reducing hedging costs by an estimated 25–50 basis points, PSU appetite for ECBs could increase by 30–50% through September 2026, adding $3–5 billion in additional dollar inflows.

4. Hedging costs for fresh FCNR (B) Deposits:

RBI proposed extending the facility to cover the full hedging costs for AD banks until September 30, 2026, for raising fresh 3–5-year Foreign Currency Non-Resident (Bank) FCNR (B) deposits. Accordingly, on Monday, June 8, 2026, the RBI launched a US dollar-rupee forex swap facility for fresh FCNR(B) deposits with maturities of three to five years. The swap facility takes effect immediately and will remain open until October 16, 2026, for deposits mobilized between the date of the circular and September 30, 2026.

The forward premium for hedging the exchange rate of FCNR deposits currently stands at 3.5 to 4 percent. FCNR(B) deposits are also exempt from the CRR/SLR. As a result, banks are expected to mobilize fresh FCNR deposits until September 30 by offering an additional 150 to 200 basis points of higher interest to attract them.

NRIs will greatly benefit from this offer. During the 2013 taper tantrum, in response to a similar move, banks mobilized an additional US$34 billion in FCNR deposits. The markets now expect that banks may be able to garner an additional US$35-40 billion in FCNR(B) deposits.

Since every dollar mobilized through the fresh FCNR (B) route is fully deployable as lendable resources. For every $1 billion, Rs. 9,500 crores of liquidity are created. If it reaches US$40 billion, the lendable resources will total Rs. 3.8 trillion. This opportunity can improve credit flow and protect banks’ sagging NIM. It is the right opportunity for banks with a strong overseas network to aggressively market the new FCNR(B) scheme by quoting competitive interest rates, creating a win-win situation for most stakeholders.

5. Restoration of the realization period for export proceeds:

The timeline for realizing USD export proceeds has been restored to nine months, ending the previous temporary 15-month extension. This RBI move aims to accelerate foreign exchange inflows, improve liquidity in the forex market, and strengthen India’s external sector amid global economic uncertainty. The restoration of the timeline is expected to improve the timing of foreign exchange inflows and support India’s balance of payments amid ongoing global uncertainty, volatile capital flows, and pressure on emerging-market currencies.

If all these well-intentioned measures to accelerate the flow of US$ into the Indian forex markets work through, the rupee is expected to appreciate to close to Rs. 90 per dollar over the next 3 to 6 months, and forex reserves could breach the US$750 billion mark by December 2026. In the relaxed policy ecosystem, the overseas investors/NRIs/overseas lenders may look back at Indian investment markets – equity/debt/FCNR deposits, keeping long-term interests in mind.