Forex strategy must go beyond short-term flows and import substitution

The basic idea behind the liberalised FCNR (B) scheme and other such measures is to attract foreign-currency flows, which will help RBI build foreign-exchange buffers at a time of global uncertainty

Foreign-exchange mobilisation under the concessional swap facility, announced by the Reserve Bank of India (RBI) on June 5, has thus far been better than many had expected. The data released by the RBI on Monday showed that the funds garnered under foreign currency non-resident (bank) — or FCNR (B) — deposits, overseas foreign currency borrowing, and external commercial borrowing reached $20.72 billion till July 17. The inflows have been dominated by FCNR (B) deposits at $17.41 billion. The Union government, as reported by this newspaper, has given targets to public-sector banks for such deposits. The expectation is that a total of about $90 billion will be mobilised by the time the concessional facility closes on September 30.

 

The basic idea behind the liberalised FCNR (B) scheme and other such measures is to attract foreign-currency flows, which will help the RBI build foreign-exchange buffers at a time of global uncertainty. Since India runs a current-account deficit (CAD), which could widen because of higher prices of crude oil, it needs more foreign flows to bridge the gap. The situation has been further exacerbated by sustained outflows on the capital account because of various reasons, including geopolitical factors. Notably, India faced a balance-of-payments (BoP) deficit over the past two financial years as well. Thus, it will be critical how the inflows under the concessional facility are treated. A possible increase in foreign-exchange reserves on account of higher inflows will automatically reduce speculative bets against the rupee. However, these inflows should not be used to defend the rupee against fundamentals.

 

The situation in West Asia has worsened again with no endgame in sight. After a sharp decline, prices of crude oil have moved up, which is putting pressure on the rupee. What India needs is a stable, long-term flow of capital. Foreign direct investment (FDI) is considered the most preferred form of foreign capital. Even as gross FDI is not growing at the desired pace over the years, net FDI, which matters for the BoP, has been under pressure owing to outbound investment by Indian companies and repatriation by foreign companies. Net FDI declined from about $44 billion in 2020-21 to just about $1 billion in 2024-25. This has improved since, but not to the required level. Net FDI in 2025-26 increased to $7.65 billion. With the growing size of the Indian economy and maturity of foreign companies, some outward FDI and repatriation are to be expected. India needs to create conditions to attract more investment and retain it for longer periods. In the absence of such flows, India has to depend on short-term flows, which tend to be more volatile.

 

In such conditions, policymakers may want to cut imports, which will not help the Indian economy in the long run. A report in this newspaper last week, for instance, showed that the Union government is working with states to substitute imports worth $189 billion in over 1,200 products. While policymakers should always aim to create better conditions for businesses, India’s own experience shows import substitution doesn’t work. It might, in fact, start affecting input costs and quality, making Indian exporters uncompetitive. In effect, such policies tend to worsen the problem they aim to solve. The world is changing, and geopolitical disruption is just one aspect of it. India needs a better strategy to protect its interests and grow at a faster pace while maintaining macrostability.