Understanding the past is key to ascertaining the future. So, let’s review. The RBI ended the FCNR(B) scheme on August 31, a month earlier than planned, suggesting that the $133 billion that the scheme had attracted was more than sufficient. Yet on October 10, the RBI tightened foreign exchange regulations significantly, including imposing a hefty tax on forward purchases of dollars. Naturally, people are asking: Why were these measures necessary if the FCNR(B) scheme was hailed as a success?
The answer is not clear. The RBI has mentioned the need to preserve financial stability, but surely the Indian financial system is not in any danger. In the absence of a clear official explanation, the public is left to figure out what problem these measures are meant to address, whether they will succeed or whether their benefits will outweigh the costs to the economy. Let’s try to address these questions.
There are two possible explanations for why the rupee has been depreciating for such a long time: Sentiment towards the Indian economy has soured or India’s balance of payments (BoP) is suffering from structural shocks.
Consider the case where the problem is merely one of sentiment. In that case, it may be reasonable to think that strong measures could jolt the market back to its senses.
Reasonable, but wrong. We know this because that strategy has already been tried and it didn’t work. Despite the huge FCNR (B) inflows, the RBI has continued to actively intervene in the foreign exchange markets and, according to some estimates, it has already used up nearly half the dollar inflows mobilised through various concessional swap schemes introduced since June 2026, including the FCNR(B) scheme. Yet the rupee has continued to depreciate. And it now seems that these schemes were not enough, which is why the RBI has resorted to regulatory interventions.
This suggests that the rupee’s decline may not merely be a problem of worsening sentiment; it could be a structural story. In fact, over the last couple of years, India has been hit by a series of macroeconomic shocks, such as falling behind in the development of frontier artificial intelligence (AI) models and the West Asia war, which has imposed a huge energy bill on the country. Perhaps the most disappointing has been the realisation that “China+1” did not translate into a shift of global manufacturing to India, as can be seen from the low levels of foreign direct investment.
If these are indeed the underlying factors responsible for the rupee’s persistent decline, then yet another round of palliative measures will, at best, provide short-term relief. It is true that palliatives can at times be useful, as a way to buy time until more fundamental cures are implemented. However, the problem in this case is that the benefits of the recent measures are likely to be small, and will be exceeded by their costs.
First, the sudden imposition of such stringent measures so soon after the “successful” June 2026 schemes, suggests to the market that the RBI is deeply worried about India’s BoP prospects. It signals that the RBI has concluded that conditions are so fragile that conventional interventions in the spot and forward markets are no longer enough to manage currency volatility. It is then natural for foreign investors to worry as well. In other words, rather than restoring confidence, the RBI’s new measures risk reinforcing the very pessimism they are meant to address.
Second, the new measures have already resulted in a big jump in currency hedging costs. According to some reports, the one-year forward premium has risen above 4.5 per cent, its highest level since January 2022. For importers, exporters or investors using forward contracts to buy or sell dollars in the future, a higher forward premium means it becomes more expensive to hedge currency risk. This is particularly costly for Indian manufacturers, many of whom depend heavily on imported inputs. As hedging becomes more expensive, they will now be forced to bear greater currency risk themselves. This uncertainty can further discourage them from investing, the exact opposite of what the economy needs.
In the end, the latest measures announced by the RBI are unlikely to stem the rupee’s decline, but they risk imposing further costs on an economy where underlying growth momentum remains weak. This brings us back to the central question: What prompted the RBI to take such drastic steps? It is important for the central bank to explain the rationale behind its decision and how it expects the benefits to outweigh the costs.
The writer is associate professor of economics, Indira Gandhi Institute of Development Research, Mumbai
 "rupee, RBI, FCNR(B), dollar inflows, forex intervention, foreign exchange reserves, banking system liquidity, WACR, VRRR, cash reserve ratio, ICRR, dollar swap")