In Might 2026, amid the raging US-Iran struggle, PM Narendra Modi urged residents to scale back gold shopping for, journey overseas and gasoline consumption to protect India’s international alternate reserves which had come beneath stress on account of rupee’s depreciation exacerbated by the Center East battle.Earlier than the beginning of the struggle on the finish of February, India’s foreign exchange reserves had hit a report excessive, however the Reserve Bank of India’s (RBI) steps to curb rupee’s slide and the drain on account of rising gasoline prices and gold import values strained the foreign exchange reserves.Now, months after the beginning of the battle, India has reported its highest ever international alternate reserves of over $740 billion! Foreign exchange reserves hit a report excessive final week itself at $729 billion, and this week has seen an additional rise. In truth, reserves have for 9 weeks now!.How has the RBI managed to safe excessive foreign exchange reserves in instances of world financial uncertainty? What’s labored for India and why does the rise in foreign exchange cowl matter? And, importantly, is it sustainable?
RBI’s FCNR(B) window bonanza
What the RBI did was easy, however with better-than-expected outcomes: The central incentivised Indian banks to draw foreign-currency deposits from abroad Indians. This was completed by absorbing the currency-hedging prices on FCNR deposits. This helped banks by lowering the exchange-rate threat and allowed them to supply extra engaging returns to depositors.FCNR(B) deposits are primarily foreign-currency deposits that non-resident Indians can maintain with Indian banks, with the principal and curiosity maintained in a international forex.The association additionally allowed banks to leverage the foreign-currency deposits, with some lenders providing loans a number of instances the unique deposit. The initiative helped deliver recent greenback inflows.
What was the FCNR(B) scheme?
And the scheme has resulted in bumper inflows!RBI has garnered $136.38 billion by the particular greenback swap scheme which it launched in June to replenish international forex provides and strengthen its reserves struggle chest.The inflows have far exceeded the RBI’s preliminary estimate of about $80 billion. In truth, almost half the mobilisation got here within the remaining 10 days earlier than the scheme closed on August 31.FCNR(B) deposits accounted for $127.23 billion, whereas abroad foreign-currency bonds contributed $5.3 billion and exterior industrial borrowings $3.9 billion. The programme tapped India’s 35-million-strong diaspora and was designed to assist assist the rupee because it got here beneath stress.
Foreign exchange reserves at report excessive
Not solely that, the construction additionally allowed NRIs to borrow considerably greater than the quantity deposited. In some circumstances, borrowing might be as a lot as 19 instances the deposit, with the borrowed funds positioned as FCNR(B) deposits.This has led to India’s foreign exchange reserves touching new data even amid the battle.The scheme revived a technique used in the course of the 2013 taper tantrum, when an analogous window attracted about $26 billion and helped gasoline a pointy rupee rally. The newest scheme was so profitable that RBI ended the FCNR window a month sooner than introduced.
What it means for India
Consultants attribute a big a part of the rise in foreign exchange reserves to RBI’s swap window. The added cowl works properly within the present financial scenario, offering an vital buffer from exterior shocks.Consultants additionally observe that whereas inflows from the swap facility had been increased, foreign exchange reserves haven’t seen a commensurate enhance on account of doable central financial institution interventions to step rupee’s fall.“The swap facility has been liable for the majority of the current reserve rebuilding, although the extent of carry is decrease than the size of inflows, implying some offset by intervention and balance-sheet changes,” says Radhika Rao, Senior Economist and Government Director at DBS Financial institution.In line with Rao, the rise in reserves strengthens India’s capability to handle an oil shock, even when it doesn’t basically alter the economic system’s dependence on imported power.
How India mopped up {dollars}
“FCNR deposits are often medium-term liabilities and thereby a extra sturdy type of financing. Additional out, authorities might be targeted on producing extra resilient sources, together with current-account-generated assist, capital inflows, FDI, and remittances to backstop the reserves’ inventory,” she tells TOI.Importantly, the elevated foreign exchange reserves amid international turmoil present confidence to traders and likewise retains the speculators at bay understanding the RBI has the firepower to intervene if there’s extreme speculative commerce.Ranen Banerjee, Associate and Chief, Financial Advisory, PwC India says that with foreign exchange reserves overlaying over 10 months of imports, India is in a cushty place.“The export margins on refined petroleum merchandise have elevated considerably and we’re getting some cushion from the exports of those merchandise given the hit on international refining capability. Therefore, we have now a partial cushion on oil value shocks from these exports,” he explains.“The FII outflows have ebbed, FDI is enhancing, investments are rising and given markets have been subdued for nearly 2 years, the valuations are normalising. Therefore, the foreign exchange reserves are unlikely to face any speedy outflow issues,” he provides.Madan Sabnavis, Chief Economist, Financial institution of Baroda is of the view that India’s foreign exchange place was sturdy coming into into the disaster, and has now strengthened additional.
How India used its diaspora to defend rupee
“Foreign exchange reserves had been already fairly sturdy overlaying 10-11 months of imports and therefore had been resilient. Including these {dollars} simply makes the place a lot stronger. At a unique stage given the reasonably excessive ahead place of round $100 billion, these incremental deposits would in a means steadiness them,” he tells TOI.He provides that the present cushion is sturdy for at the very least a 12 months, serving to enormously in cushioning the blow. “We’ve got been having a damaging steadiness of funds within the final couple of years. This may make it optimistic,” he mentioned.
Rupee on upward curve
With report inflows reported, the rupee has appreciated to hit a two-month excessive. Consultants imagine that had the window not existed, rupee’s depreciation would have been extra fast.On Thursday, the rupee strengthened by 49 paise, or 0.5%, to finish at 94.48 in opposition to the greenback, marking its highest stage in two months.The rupee’s appreciation adopted the RBI’s disclosure on Wednesday that its particular initiative to draw international forex deposits from non-resident Indians had generated a number of billion {dollars} of inflows.DK Srivastava, Chief Coverage Advisor at EY India says that within the absence of FCNR contribution, it’s seemingly that the rupee would have depreciated additional.“It could be famous that the stress on the rupee is pushed by market forces, the steadiness between imports and exports of products and companies, internet move of capital and international crude costs. RBI doesn’t goal to intervene in correcting the path of change of the alternate charge which is decided by these broader forces. At finest, it tries to comprise the volatility of the INR/$. This grew to become doable by the FCNR contribution,” he tells TOI.
Rupee vs Greenback: Up upward curve
Warning forward?
The US-Iran struggle is much from over and India continues to be importing power wants equivalent to crude oil, LPG, and LNG at excessive costs. Overseas traders are nonetheless pulling out cash and the worldwide financial headwinds proceed.India’s foreign exchange cowl has grown, which supplies the economic system with a reputable exterior sector defend. However, the street forward could proceed to be bumpy in lieu of continued exterior pressures.DK Srivastava strikes a cautious stance.The earlier peak of India’s foreign exchange reserves was $728.5 billion on the finish February 2026 which was virtually equal to the $729.3 billion submit FCNR scheme, he notes.“Thus, the current stage of foreign exchange reserves was already achieved earlier when the steadiness of commerce was extra beneficial. It is crucial for India’s foreign exchange reserve profile to realize a extra optimistic steadiness of commerce reasonably than rely upon one time schemes which assist to attenuate depletion within the foreign exchange reserves,” he tells TOI.
Diaspora flows hit $127 billion
Some consultants have additionally flagged the eventual hedging price for RBI. However stories counsel that the federal government expects the central financial institution to face restricted materials prices from the swap facility.Whereas economists have estimated that hedging might price the RBI round 3% of roughly Rs 12 lakh crore, or Rs 36,000 crore, policymakers imagine the returns from investing the {dollars} in US Treasuries might offset these prices.Even because the reserves contact report excessive, PM Modi has urged Indians to proceed preserving foreign exchange. He has requested folks to not go for international holidays, host weddings overseas, or purchase gold except obligatory. And that itself is indicative of the federal government’s measured method regardless of financial resilience.
