Will India Once Again Turn to Its Diaspora for Capital, and Will It Work?

The Indian government seems to be reopening its old playbook of stabilising the rupee by raising foreign currency funds from the Indian diaspora. The first chapter of this playbook was incidentally written first in 1991 with the issuance of the India Development Bonds. Resurgent India Bonds were floated in 1998 followed by India Millennium Deposits in 2000. In 2013 the RBI opened a subsidised swap window to incentivise banks to raise FCNR deposits. 

News reports are somewhat unclear on whether this will take the form of a bond issuance by big state-owned banks or a push to raise FCNR deposits, but in effect, both entail the same things. First, these bonds or deposits have to offer higher interest rates than market rates currently prevailing in global markets to sweeten the deal. Second, banks would need to hedge their entire exposures given the current volatility in the rupee and will likely have to be coaxed into raising these funds by offering them subsidised hedges through a dedicated window operated by the RBI. The bottom-line is that this would mean significant costs to the exchequer.

One could argue that these costly “emergency” measures are unwarranted simply because there is no immediate emergency. A quick comparison of India’s current external financial position with the last time that the government used them — in 2013 — might seem to support this claim. This was the infamous taper tantrum when the rupee depreciated by 20% in just four months. 

In 2013, India’s current account deficit was roughly 4.8% of GDP, well over twice the most aggressive market estimates of the CAD for 2026-27 (the median is 2% of GDP). Current reserves of about $700 billion cover about 10 months of likely imports in 2026-27.  The corresponding number for 2013 was just about 6 months.

However, this argument misses some critical points. First, the problem is not primarily an out-of-control current account deficit  but more the absence of adequate dollar inflows to fund even what seems, prima facie, to be a  “manageable” current account deficit.  The root of the seemingly unending rupee depreciation is to be found in the capital account that has witnessed sustained  portfolio capital flight over the past fifteen months. 

Thus, with a current account deficit of $85-$90 billion for 2026-27, India could face a funding gap (current account deficit minus capital account surplus) of $65-$70 billion. These estimates are premised on some moderation in both oil prices and capital outflows. If oil prices remain firm and foreign investor selling ramps up, things could be worse.

Foreign portfolio selling and the pressure on the rupee involves two related and somewhat unexpected developments. The first is the “growth-capital flow paradox” where solid growth (the market puts 2026-27 GDP growth at 6.7% on the back of 7.6% estimated for 2025-26) that puts India at the top of the league table for major economies has failed to attract capital.  Secondly, researchers claim that the presence of a large stock of reserves itself should act as a brake on currency depreciation. That does not seem to hold this time around.   

There are many reasons for the seeming disaffection with Indian assets. Its origin probably lies in the fact that India is seen as a marginal player in the new technologies — AI, bio-tech and renewables — that have driven global capital flows. Investors have, since 2025, been more interested in “innovation” than headline growth numbers in allocating funds. Money has “rotated” from India into innovation economies like China and Taiwan and of course the US, driving a steady decline in the rupee.

The oil price shock hasn’t helped matters. Among Asian economies India has, along with Japan, one of the highest energy import bills of 4-5% of GDP. The rupee has borne the brunt of this turn in sentiment. 

The move to bring in dollars through lumpy inflows like NRI deposits or a bond to stabilise the rupee is perhaps based on the following assumption. While the dollar flows through the scheme might, on its own, help fill only a fraction of the balance of payments gap, they could lead to, at least, a temporary significant appreciation in the rupee. The bet seems to be that this appreciation will break the vicious cycle that currently operates in the rupee market. 

What is this vicious cycle? The fear of currency depreciation eating into returns  leads to fund outflows and keeps inflows away. This, in turn, through a classic case of a self-fulfilling prophecy leads to actual depreciation validating the investor’s fears. The hope among those who advocate lumpy intervention through deposits or bonds is that this one-off appreciation will break this “doom loop”.  This in turn could wring out some of the currency risk of Indian assets and start bringing in other capital flows compatible with India’s macro growth prospects. A large policy-induced capital flow will not only help the BoP math but send a strong signal that the government will do what it takes to reverse the rupee’s course. The vicious cycle could then turn virtuous.

Will this work? Previous attempts to raise funds from the Indian diaspora suggest that NRIs seem willing to transfer money if the price is right. Besides, foreign banks have, in the past, been ready to offer NRIs depositors’ leverage to benefit from the arbitrage that these schemes offer. Thus the paucity of dollar funds for these things might not be a binding constraint.

That said, this money will not be cheap. In 2013 when a similar scheme was attempted, there was a global liquidity glut. Money is much tighter today. The US 10-year bond, that one can use as a benchmark for pricing, traded in the 2-3% handle while today it trades close to 4.5%. Thus the interest charge for these funds will be high both in relative and terms. Add to this the subsidy on hedging these funds. A hefty fiscal bill in short.

This cost will have to be weighed against the potential and expected benefit of this heavy-duty intervention. It will also have to be evaluated against other options. The current strategy of direct intervention in the spot and forward market along with soft capital controls like restrictions on the open positions of banks seem to be losing their bite. A separate dollar window at the RBI for oil purchases at a fixed rate seems too timid given the intensity of the momentum against the rupee. 

If the impact of the September 2025, GST revamp is something to go by, another round of bold reforms is unlikely to change investor sentiment. Finally, letting the rupee find its own level might be disastrous both in exacerbating capital outflows and importing more inflation.

Ultimately, all macro-management strategies are a considered bet with the risk of things not working out as planned. That is a risk that the government and the RBI need to take at this stage. Trying to bring in foreign capital at a time when there is a desperate shortage of it seems to be what the application of Occam’s razor would suggest. It’s a bet worth taking.