OPINION Time for another Resurgent India Bond to get in dollars and shore up rupee?

This is the first time since the rupee became market-driven that we have had two consecutive years of BOP deficit.

The rupee's persistent fall has been a source of worry, and the latest move by the government to amend Press Note 3 to allow investments from neighbouring countries (read China) to flow more easily is one more step in the direction of ensuring dollar flows as well as giving a fillip to growth.

This latest step, along with what seems to be the peaking of crude oil's volatile surge, may bring some respite to the RBI's rupee woes. Yet the war is by no means over, and the large and persistent outflow of foreign portfolio investments has not stopped. To the extent these outflows continue, the rupee's woes will not be over.

Hence, the question the government and RBI need to ask themselves is whether it is necessary to dust some of the tried and tested schemes that India has used in the past to shore up the rupee - the Resurgent India Bonds issued to NRIs in 1998, the Millennium India Bonds issued in 2000, and the dollar-swap scheme of 2013.

The argument that such a scheme is premature is valid. India still has plenty of FX reserves, enough to cover nearly 9 months of imports. Even if one nets out forward sales, FX reserves at $660 billion-plus are enough for over 8 months of imports(counting goods & services). In the past, in several years like FY09, FY10, Fy17, Fy18, Fy20, Fy22 and so on, India's forex reserves covered less than 8.5 months of imports, and the rupee depreciated barely 1% and even appreciated in years like Fy18 and Fy10.

KEY INDIAN EXTERNAL DATA

Clearly, it is not high imports or the current account deficit levels that are worrying the currency markets. In fact, since FY20, India's current account deficit has been averaging just about 1% and since FY24, it has been below 1% versus over 2% in the previous decade from 2009 to 2019.  Despite this, FY25 saw a steep over 5% depreciation of the rupee in a year when all EM currencies appreciated and the dollar itself depreciated 6%.

So what accounts for the steep rupee depreciation? It is clearly not a high current account deficit, but foreign capital outflows, creating a deficit in the capital account. Capital flows into India have been robust since the start of the new millennium, i.e., from 2001, rising from $30-40 billion dollars a year in the first decade (2000 to 2010) to an average of $60 billion inflows per annum in the 2010 to 2019 decade and averaging over $75 billion a year since 2020-2024.

The steep decline to a paltry $17 billion in FY25 and to zero in Fy26 has been the cause of the pain on the rupee. This tapering of capital flows is a rare phenomenon for India since the exchange rate became market-driven in 1992. Flows did taper in1998 when sanctions were imposed on India by the US post our nuclear blast at Pokhran, and that's when India issued the Resurgent India bonds to NRIs, tempting the Indian diaspora with a dash of patriotism and a large dose of high returns. The formula was reapplied in 2000, when FX flows thinned due to a global slowdown and the slowdown in India, and the Kargil war.

The only other time capital flows and the BoP fell sharply was before and during the taper tantrum in FY12 and FY13. That's when RBI announced a special swap scheme whereby RBI swapped dollars lying with banks into rupees for a paltry 3.5% for 3 years when the going market rate for the swap was 7%.

So the question doing the rounds is whether it is time to dust these schemes again. To be sure, the RBI and the govt can wait. FX reserves are at $728 bn, and even netting out the forward sales, the FX kitty is a healthy $660 billion-plus.  The balance of payments deficit in FY25 and in FY26 together will maximum be $50 billion dollars. This is no time to panic. But there is scope to be concerned and to plan.

This is the first time since the rupee became market-driven that we have had two consecutive years of BOP deficit. It is also the first time that Indian stocks have so seriously underperformed global markets. As of today, the one-year returns from US indexes are over 20%, Kospi rose 125%, Taiwan and Nikkei indexes returned over 50% as did Brazil and most Southeast Asian equity indexes rose over 25%.  In contrast, the Indian Nifty is up just 5% in the past 12 months.

The hope was that as the trade deal gets signed and corporate earnings turn around to double-digit growth, FPIs will return. The high cost of crude and the likely impact on corporate margins postpone the hope of a turnaround in earnings. Also, crude may be higher for a few months now, even if the high-intensity Gulf war ends, which in turn will widen the trade deficit and hurt sentiment. An even bigger problem is gold. In the quest for diversification from moderately performing equities and the high-decibel rally in the precious metal, Indians have rushed to buy gold ETFs. Flows into gold ETFs equalled flows into equity MFs in Jan 2026, leading to record gold imports and hence a record trade deficit in January. Thankfully, the craze appears to have ebbed, and the gold ETF flows in February are only Rs 5000 cr. But the glitter remains.

For all these reasons, RBI may be well advised to keep a dollar-attracting scheme ready.  Importantly, these schemes ought not to be employed when all markets and currencies are in trouble, as in 2008. They have been and have to be used only when the world is well, but the Indian is stressed. Right now, the war is stressing all currencies and markets. There is no point throwing good money into such a storm. The RBI and government may be well advised to think through schemes and be ready, in case the world recovers, but capital flows are still wary of entering India because of a wobbly currency. That would be the time, if at all, to launch such a scheme.

Capital flows are avoiding India for a bunch of reasons: low earnings growth versus historical pace, high equity valuations, no A.I. stocks, and consistent rupee depreciation, erasing a foreign fund’s gains within days of investing. A dollar-attracting scheme from RBI can only counter the last factor – the persistent rupee fall that is scaring long-term investors. The scheme cannot counter negatives like slow corporate earnings growth. Hence, any such dollar-attracting scheme is only a salve till government schemes like the amendment of press note 3 and corporate earnings and valuations begin attracting investment flows.