RBI explores steps to mobilise dollar inflows as rupee slides, sources say

The Reserve Bank of India is exploring methods to attract dollar inflows to strengthen its foreign‑exchange buffers and ease pressure on the rupee caused by surging oil prices linked to the Iran conflict, according to three people familiar with the talks.

The rupee has dropped 5.5% so far this year, touching a record low of 95.33 against the dollar last Thursday. Foreign‑exchange reserves have slipped from a high of $728.5 billion, and equity outflows totalled $19 billion in March‑April alone.

The RBI says its reserves remain sufficient to cover roughly 11 months of imports, yet recent talks highlight a renewed need to shore up defenses as capital outflows accelerate.

These internal deliberations have not been disclosed before, although analysts have speculated that officials could revive tools used during past crises.

One idea under review is to reinstate a 2013‑era scheme that attracted dollar deposits from non‑resident Indians, according to two sources. Another possibility is to scrap the withholding tax on foreign holdings of Indian government bonds to spur inflows, they added.

No decision has been finalized; any action would be coordinated with the government, a third source noted. Reuters was unable to determine a timeline for a decision.

“Both options are being weighed seriously,” the source added, pointing out that the ultimate authority on tax changes lies with India’s federal finance ministry.

The sources asked to remain anonymous because they are not authorized to speak publicly. Emails requesting comment from the RBI and the finance ministry went unanswered.

The ongoing U.S.–Israel–Iran conflict, now in its third month, has pressured the rupee, contributing to a nearly 5 % decline in 2025.

The two proposals under discussion could help attract dollar inflows from abroad.

The deposit facility, deployed in 2013 to steady the rupee, mobilised roughly $26 billion when U.S. rates were near zero; at that time the central bank let banks exchange the raised dollars at preferential rates.

The alternative under talks is to abolish the 5 % withholding tax on foreign investors in Indian government bonds, a move the sources say could boost inflows.

Foreign investors were net purchasers of Indian government bonds in 2025, putting in about $6.5 billion, but the trend has weakened in 2026, with inflows of roughly $1.1 billion year‑to‑date as caution grew after the Iran conflict.

Equity outflows have sped up, pushing cumulative 2026 withdrawals to roughly $20.6 billion—surpassing the total outflow recorded for the whole of 2025.

The steps are chiefly aimed at strengthening foreign‑exchange reserves and stabilising the rupee, according to one source.

The RBI has already cracked down on bank arbitrage trades and encouraged oil firms to cut spot‑market dollar buys to prop up the rupee. Still, its effectiveness mirrors that of other oil‑importing Asian economies.

PRESSURE ON FOREX RESERVES

India’s foreign‑exchange reserves have more than doubled since 2013, a period when the rupee faced pressure alongside other emerging markets after the U.S. Federal Reserve signaled a taper of its quantitative‑easing program.

Reserves now stand at $698 billion, a level RBI Governor Sanjay Malhotra labelled “adequate” in a weekend address.

However, reserves have slipped from the $728.5 billion peak, and analysts warn that the headline number overstates the RBI’s usable firepower because it includes $104 billion of short‑dollar forward obligations.

The RBI has mounted heavy interventions in both the spot and forward foreign‑exchange markets to curb the rupee’s slide.

The proportion of gold in the forex reserve basket has risen, trimming the pool of liquid foreign‑currency assets, noted Vivek Kumar, economist at Mumbai‑based QuantEco Research.

“The effective foreign‑currency component of reserves was $449 billion in March 2026,” Kumar observed.

“Continued turmoil in the Middle East could erode the import‑cover ratio further,” Kumar added, noting that policymakers might need to curb the trade deficit and lure more capital inflows.

Published on May 4, 2026