India mobilized an astronomical $136.4 billion (about 186 trillion won) from a diaspora of 35 million to defend its currency, which had fallen to a record low. The Reserve Bank of India (RBI) did not rely on a simple patriotism-driven fund drive; instead, it deployed financial engineering that maximized interest arbitrage and lending leverage.
According to the Hindustan Times and the Times of India on the 3rd (local time), the Central Bank of India ended early, as of Aug. 31, the special foreign-currency deposit program it introduced in June. The Central Bank of India had planned to run the program through the 30th of this month, but it closed it a month early after the inflows far outpaced the target sooner than expected.
As of the 31st of last month, foreign-currency non-resident Indian deposits (FCNR; Foreign Currency Non-Resident) brought in through the program totaled $127.2 billion (about 172 trillion won). Adding in foreign currency separately borrowed overseas by corporations and banks brings the total to $136.4 billion, 70% above the $80 billion (about 108 trillion won) the Central Bank of India had expected.
The Indian rupee exchange rate moved below 89 rupees per $1 at the start of the year, then climbed to 96.96 rupees per dollar in May, setting a new all-time high (a fall in the rupee's value). India is the world's No. 3 crude oil importer, buying 85%–90% of the oil it uses from overseas. Because payments are made in dollars, the international currency, when it is 90 rupees per dollar, $100 worth of oil costs 9,000 rupees, but at 97 rupees it costs 9,700 rupees. On top of that, after the United States and Iran went to war at the end of Feb., Brent crude prices themselves surged to around $97 a barrel, adding to the burden.
India's economic fundamentals also wobbled more than usual this year, helping drag down the rupee's value. The goods trade deficit for the second quarter, from April to June, was $86.1 billion (about 117 trillion won), up 25% from $68.9 billion a year earlier. As exchange rates swung and the economy deteriorated, foreign investors pulled $24.6 billion (about 33 trillion won) from Indian stocks this year. With the 10-year U.S. Government Bonds yield climbing to 4.78% and high rates persisting, money flowed out of emerging markets including India and into U.S. assets.
To break the crisis, the Central Bank of India turned to the vast overseas diaspora network of 35 million. According to the U.N. Department of Economic and Social Affairs (UN DESA), as of 2020, Indians living abroad formed the world's largest migrant group, surpassing China. In particular, they have put down roots in high value-added industries such as information technology (IT), health care, and finance in the United States and the United Kingdom. The International Organization for Migration (IOM) tallied that in 2024 they sent $137 billion (about 186 trillion won) back to India. That is an overwhelming No. 1 in the world, more than double No. 2 Mexico. Indian banks dispatched dedicated staff not only to North America and Europe but also to the Middle East, Singapore, and London to fiercely compete for their funds.
Instead of simply appealing to patriotism, the Indian government offered a thoroughly capitalist incentive: "high interest subsidized by the government." Typically, when banks take foreign-currency deposits, they sign forward contracts to avoid exchange-rate risk and spend 2%–3% of deposits each year on this transaction. A forward is a contract to buy or sell dollars and the like at a fixed exchange rate at a specific point in the future. Because ordinary foreign-currency deposits are docked this expense, their interest often runs below that of regular products.
However, as of June 5, the Central Bank of India agreed to shoulder the full forward expense for 3–5-year non-resident Indian foreign-currency deposits. With exchange-rate risk eased, Indian commercial banks promised the diaspora rates far above normal times. On the day the window opened, the 5-year U.S. Government Bonds yield was 4.3% annually, but State Bank of India, the country's largest bank, offered 5.25%–6% annually—more than 1 percentage point higher—for the same-maturity non-resident Indian foreign-currency deposits. Some banks guaranteed rates up to 7.5%, depending on conditions.
On top of that, some financial customers were allowed leveraged transactions of up to nine times. For example, if a depositor placed $100,000 (about 136 million won) with an Indian bank, the bank's overseas branch took the deposit as collateral and lent up to an additional $900,000. The extra $900,000 was then reinvested in the Indian bank. If only $100,000 of one's own money is deposited, at an annual 6% rate the depositor receives $6,000 a year. By contrast, adding the $900,000 raised with leverage to make a $1 million deposit increases interest to $60,000, 10 times more. The depositor then uses that interest to pay the interest on the $900,000 borrowed from the overseas branch. Because the rate on non-resident Indian foreign-currency deposits offered by Indian banks is higher than rates on overseas deposit products, the structure allows an arbitrage profit. In return, the depositor cannot withdraw funds for the first year, and even after that, early withdrawal before maturity incurs a penalty.
The tumbling rupee rebounded after the policy was announced in early June, rising 1.4% off the bottom. The rupee-dollar rate stood at 94.485 per dollar on the 3rd, the strongest in 10 weeks. The Central Bank of India chose to stockpile the non-resident Indian foreign-currency deposit inflows in its vaults rather than inject them immediately into the spot foreign-exchange market, where dollar supply is short. The move is seen as aiming to stockpile dollars to deploy into the market if the rupee weakens again, rather than pushing the rupee up further right now. As a result, India's foreign reserves jumped to a record $729.3 billion (about 988 trillion won) as of August.
Some experts warned that this unprecedented dollar hoovering could create a new macroeconomic dilemma. Since June, the Central Bank of India has released corresponding rupees into the market in return for receiving more than $136 billion from commercial banks. As a result, surplus liquidity in the Indian banking system on the 3rd surged to 9.7 trillion rupees (about 139 trillion won), surpassing levels during the COVID-19 pandemic. In trying to avert a currency crisis, the country now faces the risk that a surge in money supply at home could stoke inflation and fuel asset bubbles. India Business Today reported that, in response, the Central Bank of India is considering emergency measures to mop up excess rupees, such as issuing reverse repurchase agreements (reverse repo), selling Government Bonds, and raising the reserve requirement ratio.
Another potential flash point is that the funds raised are not India's net asset but a foreign-currency liability that must be repaid in dollars with interest in 3–5 years. The Reserve Bank of India's forward dollar repayment burden swelled to a record $136.7 billion as of July. If, at deposit maturity in 3–5 years, the rupee has fallen sharply, the central bank would shoulder astronomical currency losses under the swap contract terms. Thus, while the immediate spark of a foreign-exchange crisis has been doused, critics say the massive currency-defense expense has effectively been passed on to future generations and the Central Bank's books.
Madhavi Arora, an economist at MK Global Financial Services, estimated that "1.2 trillion rupees (about 17 trillion won) could go into these swap and liquidity measures over the next five years."