RBI’s dollar flow measures buy time, but external risks remain

MUMBAI: The success of the Reserve Bank of India’s June move to attract foreign currency inflows will depend on whether the country can strengthen its balance of payments (BoP) over the next three to five years, with economists warning that the move will only avert external sector risks.

The central bank earlier this month offered a concessional swap facility for external commercial borrowings (ECBs) and foreign currency non-resident bank (FCNR(B)) deposits to attract dollar inflows amid a sharp depreciation of the rupee, effectively buying policymakers time at a cost borne by the RBI.

The flow, however, is temporary. As ECBs mature and FCNR(B) deposits mature over the next three to five years, those dollars will need to be repaid by reversing the reflow. By then, India will need a strong BoP or large stock of foreign exchange to absorb outflows without pressuring the rupee.

Market participants estimate that the measures could bring in between $40 billion and $70 billion, providing a window to improve the country’s external position before these liabilities fall. As things stand, forex reserves of $672 billion are currently sufficient to provide import cover for about 11 months, RBI Governor Sanjay Malhotra has often said in media interactions.

“India’s foreign exchange reserves need to grow systematically, not just on the basis of banking flows, to the extent that the RBI can retire this debt after three to five years. The BoP is a major concern because we are in a structurally different world where financial conditions are tight and capital flows are scarce,” said Dheeraj Nim.

“Nobody knows what the situation will be three years from now. But if it doesn’t change, we’ll be back to where we were a month ago,” Nim said. India’s BoP has been volatile in recent years due to changes in capital flows. After recording a surplus in FY23-24, the country posted deficits in FY25 and FY26, reflecting weak financial flows, particularly in the capital account.

Concerns about sustaining flows are also linked to structural factors. India has yet to establish a leading position in emerging fields such as artificial intelligence, while the outlook for software exports, a major source of foreign exchange earnings, is becoming more uncertain, market participants said.

Currency movements create more risk. A weaker rupee will increase the cost of servicing these liabilities, as dollars raised under the ECB and FCNR(B) routes become more expensive to repay in rupee terms, increasing the effective cost for the central bank.

Unlike the 2013 episode, when similar measures were introduced during the balance of payments crisis, the current measures are pre-emptive. Abhishek Upadhyay, senior economist, fixed income strategy at ICICI Securities Primary Dealership, said, “If the rupee weakens further in the next few years, the RBI will have to bear more costs.