Analysis of India’s strategy of using NRI bank deposits to stabilize the rupee, boost forex reserves, and manage global economic shocks
Suresh Chandra Sarangi
It was at “Bretton Woods” that representatives from 44 countries assembled in 1944 to design a global monetary system. The classical gold standard of the late nineteenth century had collapsed during the First World War. On 15th August 1971, the United States ended the convertibility of the US dollar to gold, which was effectively designed and accepted by nations, linking their currency’s convertibility with that of the US dollar. Accordingly, the US dollar became the world’s reserve currency, and cross-border transactions were effectively implemented. The IMF monitors exchange rates and lends reserve currencies to countries with balance of payments deficits. The petrodollar system came into force in 1974 after a strategic agreement between the United States and Saudi Arabia. In 1975, other OPEC members adopted similar pricing in the US dollar, and thus, the global petrodollar system was anchored.
The international monetary system became the glue that binds national economies together. It helps nations balance their capital requirements for cross-border transactions. But what transpired was a currency war, although capital was globalised. The foreign exchange crises in England, Argentina, Turkey, Greece, East Asian countries, India, and Sri Lanka have resulted in massive depletion of dollar reserves, and these countries tried to get bailouts from the IMF, even after devaluation, to offset domestic currency depreciation. In 1991, Indian forex reserves went down so much that they were not enough to manage 15 days’ worth of imports, for which India borrowed from the IMF, with conditionalities like partial and then full conversion of the rupee.
This also prompted India to go for immediate financial sector reforms. In 2026, the rupee depreciated consistently, as if it were in free fall. This happened as a result of the Trump-led tariff system, followed by the Israel-US and Iran war; a breakdown of supply chain management; and oil prices going through the roof because of the blockage of the Strait of Hormuz by Iran. India imports almost 85% of its oil and gas requirements, and since oil touched almost US$115 a barrel, necessitating a huge drain on our forex reserves and consequently led to rupee depreciation.
As the rupee depreciated, FIIs started to pull out their money. The forex reserves were rapidly getting depleted and came down to 681 crores. Under such circumstances, India had to protect the rupee’s value by arresting further rupee depreciation. India never moved to the IMF. Instead, India’s central bank, the Reserve Bank of India, decided to mobilise deposits from the 30-million-strong Indian diaspora, comprising engineers, doctors, builders, professionals, and technocrats. The scheme launched by the Indian central bank had some salient features. It started on 8th June 2026 and was to continue until 30th September 2026. However, because of the overwhelming response, the scheme was prematurely withdrawn on 30th August of the current year.
Only Non-Resident Indians (NRIs) could deposit; dollars or euros had to be deposited in designated banks, and the interest varied on US dollar deposits kept as fixed deposits for a period of 3 to 5 years. The lock-in period for withdrawal by NRIs was one year. The beauty of the scheme was that the currency fluctuation risk was to be absorbed by the central bank. Interest rates were within a bandwidth of 6 to 7%, and some banks even paid 7.1%. Hedging costs were covered. The RBI exempted these funds from the cash reserve ratio and statutory liquidity requirements to lower bank costs. The deposits and interest were made 100% tax-free, with zero exchange risk, as the money remained in foreign currency, meaning that changes in the value of the Indian rupee did not affect the payment.
The scheme was an overwhelming success, and an amount of US$136 billion was mobilised. The scheme was withdrawn one month before its expiry date. The Indian diaspora came to the rescue. India’s forex reserves increased to US$729 billion. The rupee, which was exchanged at a rate of Rs 96 to a dollar, appreciated to Rs 94 against the dollar. The support helped find the rupee a reasonable value. India’s reserves climbed as the rupee found its floor price.
This is a liability, a type of borrowing that will start flowing back within 3 to 5 years to the respective depositors. In 2013, we had such a scheme. US$34 billion was mopped up. This has unleashed a global financial debate and demonstrated the ability of the Indian diaspora to make a stir in the currency market. Therefore, India not only boasts knowledge and skill, but can also help keep its own currency from fluctuating. This will stop the illegal flight of money and money laundering. Remittances from NRIs amount to almost US$100 billion a year, taking some of the pressure off the rupee and helping to arrest further depreciation.
While analysing the positive impact, it is realised that accepting deposits from NRIs would help India from the vagaries of currency swings and help build foreign exchange reserves. There is no currency risk to NRI depositors, interest earned is tax-free, there is full flexibility in repatriating the funds without taxes, and the interest is locked in and hence stable for 3 to 5 years, while looking at the issue from the perspective of the Indian diaspora.
As regards India, besides supporting the rupee and building significantly larger foreign exchange reserves, the scheme could lower local borrowing pressure and bond yields, helping the Indian banking system support the increasing demand for foreign credit. Mostly, it is a matter of liquidity management, flooding the domestic market with rupee liquidity and forcing the Reserve Bank to incur high costs to absorb the excess cash. There may be structural problems, such as an asset-liability mismatch, if, after the lock-in period of one year, the deposits, or the majority of them, are repatriated.
Critics say the FCNR(B) scheme is a double-edged sword, as it is a form of borrowing. No doubt, it is a masterstroke, and the Indian diaspora has stood solidly behind the scheme. For them, it is a win-win situation, but for the Indian central bank, it is a costlier proposition, and for commercial banks, the cost aspect cannot be written off. The brain drain has turned into a success, and the immediate result is the soaring of the rupee. Government debt will rise, putting pressure on the rupee, since it is a swap facility for one year, with maturity in 3 to 5 years. There will be huge withdrawals in foreign currency, forcing the rupee under pressure again. Domestic banks’ liquidity surplus is at an all-time high of Rs 9.7 trillion. Simply speaking, this is a forward liability burden for 2029–2031.
Let ad hocism not dictate our policy. Rather, a permanent solution to the problem of rupee depreciation has to be addressed, with an eye on the resilience of the rupee and significantly increasing forex reserves. No doubt, this will adversely affect the Reserve Bank’s balance sheet, as it bears the hedging and currency depreciation risks, and in that case, it may not be in a position to pay the central government a higher amount of dividend, which would be a fiscal drag on the government.
The DICGC protects depositors’ deposits up to Rs 5 lakh, and above that, you are technically unprotected. Some economists state that it is a stopgap arrangement and that the nation must explore the possibility of boosting the flow of foreign capital through FDI and FII. The fundamentals of the economy have to be strengthened, foreign debt has to be reduced to arrest the flight of valuable foreign exchange abroad, exports have to be the focus, and manufacturing should be the redeeming feature of increasing forex reserves, finding resilience in the rupee, and creating additional employment.
We live in an uncertain world, and posterity will say whether we chose the right path. One thing is important: the Indian diaspora has made us proud.
(The writer is a former General Manager of Bank of India. Views expressed are personal.)