Stories
India's Forex Deluge: $136 Billion Inflows Create Liquidity Challenge, 'Pseudo Rate Cut'
- •India's special FCNR(B) window and other measures attracted a staggering $136 billion by August 2026, significantly boosting foreign exchange reserves to a record $786 billion.
- •The massive dollar inflows have led to a substantial rupee liquidity surplus in the banking system, reaching around ₹11 trillion, causing overnight rates to collapse below 5%.
- •This surge in liquidity effectively acts as a 'pseudo rate cut' at a time when inflation risks are rising and global central banks are tightening, creating an uncomfortable policy dilemma for the RBI.
- •Unlike 2013, the current situation is driven by capital account pressures rather than a large current account deficit, with the RBI absorbing hedging costs to attract NRI deposits.
- •The RBI faces a difficult choice in sterilizing this liquidity, with options like CRR, OMO sales, and forex swaps each carrying their own costs and potential market impacts.
Key Questions Answered
The special FCNR(B) window attracted a staggering $127 billion, which, combined with another $9 billion mobilised through external commercial borrowings and offshore financial centre routes, drew in about $136 billion.
The FCNR(B) scheme was closed a month ahead of its original September 30, 2026, deadline because the response was exceptionally strong, overshooting optimistic market scenarios and raising concerns over reversal risks associated with excessive inflows.
When overseas investors brought dollars into Indian banks, the system received rupees in exchange, creating a massive liquidity surplus that drove overnight rates below 5% and collateralised market repo rates around 4.5-4.65%, effectively easing financial conditions without a policy rate cut.
