Industry Odisha Bureau, Aug 30: India’s foreign-exchange reserves surged to a record high after strong dollar inflows. Reserves rose by $12.4 billion, reaching an all-time high of $729.3 billion. That figure surpassed the previous record of $728.5 billion set in February. The gains followed RBI measures introduced in early June to attract overseas capital.
The steps included a special deposit programme aimed at overseas Indian citizens. FCNR(B) deposits let eligible non-resident Indians place foreign-currency funds with Indian banks. Those measures alone generated $72.8 billion in dollar inflows through 21 August. The inflows helped India avoid a third straight year of external deficit. It reflects the broadest measure of money flowing into and out of India’s economy.
The stronger reserves give the RBI greater capacity to support the rupee. The rupee still remains among Asia’s weaker-performing currencies despite a modest recovery. It has recovered roughly 1.7% from a record low hit in May. Elevated oil prices continue pressuring the currency given India’s heavy import dependence. Higher oil prices significantly raise India’s import bill and overall dollar demand. That growing demand for dollars adds further pressure on the exchange rate.
Attracting these dollar inflows is not without significant cost for the RBI. The central bank bears banks’ hedging costs under the diaspora deposit scheme. That arrangement lets lenders offer overseas customers relatively attractive deposit interest rates. Those hedging costs represent a quasi-fiscal burden borne by the central bank. Mobilising dollars is far costlier now given elevated US interest rates since 2013.
Analyst Dhananjay Sinha of Systematix Shares and Stocks flagged the scheme’s limitations. He said expensive debt-funded mobilisation shows clear limits for stabilising the rupee. The RBI typically deploys reserve dollars into lower-yielding assets than funding costs. Sinha estimated the resulting annual carry cost at roughly $5.7 billion for India.
Earlier this month, the RBI unexpectedly brought forward the deposit programme’s closure. Governor Sanjay Malhotra said dollar inflows had been stronger than initially expected.
The reserve boost strengthens confidence in India’s broader external-sector stability, analysts say. It also gives policymakers more room to respond to future rupee weakness. Economists caution the increase reflects costly mobilisation rather than organic capital inflows. The episode underscores the RBI’s core trade-off between reserve strength and funding expense. Its ultimate success will hinge on oil prices and global interest-rate trends. Analysts say reserve strength alone cannot guarantee lasting rupee stability going forward.
