RBI's Forex Window: A Trojan Horse for Rupee?

The Reserve Bank of India's (RBI) recent currency swap window, launched on June 8, 2026, has attracted approximately $138 billion by September 18, 2026. This initiative was designed to curb the rupee's depreciation and manage excess liquidity from FCNR(B) and OFCB borrowings. However, the strategy seems to have backfired, with the rupee facing renewed depreciation pressure shortly after the window's closure.

Despite the significant dollar inflows, the effectiveness of the policy is questionable. Market participants are confused as the large sum has not stabilized the USD/INR exchange rate. The published reserve figure of $740 billion is misleading, as a substantial forward book of $200 billion is managed through sell-buy swaps, potentially leaving actual reserves closer to $550 billion.

The policy has also led to a divergence in borrowing costs. While bank lending rates remain sticky, capital market borrowing costs have risen. Spreads for AAA-rated public sector undertakings and private issuers have widened over government securities, reflecting repriced domestic credit curves due to global yield movements, oil prices, and geopolitical risks. This artificial anchoring of credit yields through subsidized borrowing has created a false sense of calm.

The RBI faces a challenging policy decision. With domestic inflation concerns, exacerbated by El Niño effects, and compromised foreign exchange reserves, the central bank must decide if a 50 basis points rate hike and a 100 basis points CRR increase will suffice to absorb the excess liquidity generated by the FCNR scheme. The situation leaves India potentially tainted as an investment destination, contributing to foreign portfolio investor selling.