When India’s currency comes under pressure, the key question is whether policy buys time or space for complacency. The Reserve Bank of India’s (RBI) recent measures to attract dollars and steady the rupee should be judged in that spirit.
This is a crisis playbook, not a panic button. It is calibrated, not chaotic. But it is still only a playbook for the next few months, and not an external-sector strategy.
RBI’s package has many moving parts. Banks are being encouraged to mobilize three-to-five-year foreign currency non-resident deposits, with RBI absorbing the hedging cost. Public-sector firms have been nudged to raise foreign loans with concessional swap support. Foreign investors in government securities have been offered a wider route and lighter taxes. Export proceeds must be brought home faster.
The aim is clear: increase dollar supply, reduce speculative pressure and signal that a one-way bet against the rupee is risky. Thankfully, there are no new capital controls for outflows.
In 2013, during the taper tantrum, India squeezed outward remittances. A large outward-looking economy cannot tell the world that it is open for investment but closed for exits, education payments or asset-portfolio diversification by its citizens.
So this is not 2013 all over again. India’s reserves are large, its banking system is more resilient and its services export engine is stronger. Inbound remittances grew a solid 26% last year. They cushion the external account. But we cannot afford to gloss over the evolving stress of a dollar shortage.
India’s foreign-exchange stock has a different character from that of most large Asian economies. China, Japan, Korea and Taiwan built much of their reserve strength on persistent export surpluses.
India has almost always run a current account deficit. Our reserves are therefore not mainly accumulated export earnings; they represent accumulated confidence—of foreign investors, lenders, portfolio managers, private equity funds and the diaspora. That confidence is valuable, but reversible.
India’s capital inflows have an inbuilt liability. Portfolio flows can exit overnight. Foreign currency deposits have to be repaid. External borrowings mature. Even foreign direct investment (FDI) is not always the patient factory-building capital imagined in textbooks.
An increasingly significant share is financial capital—private equity, venture capital, sovereign funds and asset management firms—whose business model includes exits. It is equity under the law, but in macroeconomic terms, it is thinly disguised long-term debt with an exit option.
That is why gross FDI numbers can mislead. India received a record $94 billion of it in 2025-26. This shows continuing interest in India’s market. But net FDI has fallen sharply and is tiny in relation to the size of the economy and its external financing needs.
Outbound FDI by Indian companies has risen faster. Repatriation and disinvestment have accelerated. If dollars come in through the front door and leave through multiple back doors, gross inflows cannot offer external comfort. A mature market must allow exits, but maturity can’t become an euphemism for leakage.
The RBI measures also carry a fiscal hazard. When the central bank bears hedging costs, it affects RBI’s balance sheet and thus the public exchequer. In effect, the taxpayer provides rupee-depreciation insurance to a small set of forex depositors, banks or public-sector borrowers.
That may be defensible in a genuine emergency. But it cannot be routine. Else, we revert to an old habit of subsidizing foreign borrowing, except with more sophisticated plumbing.
Protection against rupee depreciation leads to moral hazard as it incentivizes staying unhedged. Not to forget the possibility of round-tripping: domestic money coming back as dollar deposits.
RBI’s aborted attempt to choke offshore speculation against the rupee is another reminder of the limits of administrative control. Clamping down on offshore non-deliverable forwards may briefly squeeze speculators, but if the measure has to be reversed or softened, the signal can be counterproductive.
Deep markets dislike abrupt rule changes. Credibility is not built only by showing muscle, but by keeping the rules predictable.
What then is a playbook that looks beyond the near-term?
First, India must reduce its structural dollar drain from energy, edible oils, fertilizers, electronics and gold, and increasingly AI tokens. Households importing gold as a savings instrument are voting against domestic financial assets. That has to be addressed by deeper, safer, inflation-beating financial products, including properly hedged sovereign gold bonds.
Second, India needs export-surplus sectors beyond IT services. Manufacturing FDI must be judged by net exports, technology transfers, job creation and domestic value addition.
The quality of FDI must matter as much as quantity. We need more greenfield, technology-bearing, employment-creating capital and less round-tripping, balance-sheet reshuffling and exit-driven inflows. Even India’s production-linked incentives must emphasize jobs and export commitments. The defects in bilateral investment treaties have to be remedied.
Finally, diversification away from the dollar is overdue. India’s ambiguity over a Brics currency is meant not to antagonize the US. That should not prevent sensible rupee trade settlement, deeper Asian currency markets and gradual rupee internationalization where India has bargaining power.
The author is senior fellow with Pune International Centre.