With the rupee weakening beyond 95 per dollar, and West Asian tensions showing no signs of easing, the need to bolster dollar inflows and support the currency has become more pressing. Measures such as curbing gold import demand, allowing retail fuel prices to adjust to moderate oil import volumes, and reducing withholding tax on external commercial borrowings may be under consideration.
But market attention is increasingly focused on incentivising fresh dollar inflows from NRIs, akin to initiatives implemented in 2000 and 2013. Those schemes mobilised sufficient foreign currency to stabilise sentiment and reinforce the external position, which explains their renewed relevance today.
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Of course, this strategy isn't free. So, what's the price tag this time? And is it worth it? In 2013, even with US interest rates near zero, the incentive required to attract foreign currency was meaningful: 3-yr non-resident deposits offered a 4% coupon on dollar balances when US money market funds were yielding about 0%. To ensure the product was both attractive to investors and viable for banks, policymakers provided funding support of 2.50% through a concession on the prevailing FX swap rate.
The starting point today is markedly different. Fed funds rate is around 3.5%, and US money market funds offer broadly similar yields. While factors such as lower hedging costs than in 2013 provide some mitigation, a meaningful pickup over US risk-free rates - and/or more substantial policy support - would likely be required to mobilise non-resident dollar funding at scale.
Against this backdrop and allowing for different combinations of deposit pricing and incentives, an estimated deposit rate of 6.0-6.25% - with funding support of 2.75-3.0% - could be sufficiently attractive to raise meaningful dollar inflows. Put differently, for every $10 bn raised, the 3-yr funding support to be provided by policymakers could be $700-850 mn, around 10-20% higher than in 2013.
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More expensive? Yes. Still worthwhile? Absolutely. Such schemes should not be interpreted as cost in conventional sense if the prime objective is to maintain macroeconomic stability. India's capital inflows have been subdued for over 2 yrs, with limited near-term prospects of a sustained recovery amid elevated global rates and continued investor focus on the AI theme.
As a result, the external position is more exposed to higher crude prices than in the past episodes. India is also on track for a third consecutive year of BoP deficit over the next 12 mths, an unprecedented outcome. To be clear, this isn't a BoP crisis yet. With nearly 9-9.5 mths of import cover (almost 3x IMF's safety net), India isn't on the ropes.
But with global shocks becoming more frequent and capital flows thinning, the external buffer is less comfortable. Given that external resilience has been central to India's macro stability and growth, incremental funding support by policymakers is unlikely to be a binding constraint.
The more material question, therefore, is not the headline price tag but scale of inflows required to stabilise market conditions, as in 2000 and 2013. For context, the 2013 NRI deposit mobilisation raised $26 bn - about 10% of reserves at the time, and roughly equivalent to two-thirds of one month's goods imports.
Today, with reserves near $700 bn and average monthly imports around $65 bn, the required quantum is materially larger. Compounding this, net annual FDI has slowed to low single digits (vs around $20 bn a year in 2013), while oil prices remain a key source of uncertainty. In short, a much larger amount of dollar funding would likely be needed to materially strengthen defences.
Relying on a single instrument is unlikely to be sufficient. Alongside incentivising dollar inflows from NRIs, a cost-sharing framework should include other commercial entities, like oil marketing companies (to support working capital needs) and banks/NBFCs (with proceeds potentially channelled toward targeted segments such as MSMEs, industry and infrastructure).
Complementary measures would also be required, like some degree of monetary tightening, greater tolerance for a weaker rupee and import-demand management, potentially by allowing retail fuel prices to play a more active role in allocating demand. Coordinated deployment of this well-tested playbook would improve the probability of stabilising outcomes.
These measures can help India withstand an adverse external environment. But they are not a substitute for addressing the underlying issue: weakening capital flows. India can neither set global interest rates nor can it replicate the scale of AI-led investment currently concentrated in the US and China. It can, however, act decisively to improve expected returns on Indian assets.
Priorities include further diversification of energy sources to strengthen energy security, faster and more reliable execution of investment projects (for both domestic and foreign investors), and a simpler, more predictable policy and regulatory framework. Ultimately, the critical test is not merely calibrating the incentive structure, or choosing the 'right' quantum of dollar mobilisation. It's improving the risk-return profile of Indian assets quickly enough for external buffers to become self-replenishing.
