RBI Revives Rajan-Era Playbook to Attract Dollar Inflows Amid Currency Pressure

As the Indian rupee faces pressure in the global markets and dollar inflows become increasingly crucial, the Reserve Bank of India (RBI) has dusted off a time-tested strategy from the tenure of former Governor Raghuram Rajan. The move is aimed at stabilizing the currency and attracting more foreign currency inflows to help cushion external vulnerabilities.

Back in 2013, during the infamous “taper tantrum,” India saw sharp capital outflows and a steep depreciation of the rupee. To counter that crisis, then-Governor Rajan implemented a series of measures that not only helped stabilize the currency but also reassured global investors about India’s macroeconomic stability. Now, the RBI is reviving parts of this playbook to tackle current currency and capital flow challenges.

One key step the RBI has taken is to reinstate the FCNR(B) scheme, which are foreign currency non-resident bank deposits. What’s notably different this time is that the RBI is absorbing the full hedging costs for three to five-year deposits, effectively making these deposits much more attractive to Non-Resident Indians (NRIs) and other foreign investors. This incentive offers a safer and more lucrative avenue for holding dollar assets in India, thereby encouraging stable inflows of dollars.

The strategy revolves around improving India’s foreign exchange reserves and mitigating volatility in the currency market by making it easier and more cost-effective for NRIs to park their funds in India. By covering hedging expenses, the RBI reduces the risk and cost burden on investors, which can be a game changer in attracting dollar inflows in uncertain global financial conditions.

This move also aligns with the RBI’s broader approach during external shocks—prioritizing building forex reserves, managing volatility through a mix of market interventions, and offering policy support to ensure financial stability. The emphasis remains on long-term sustainable capital flows rather than short-term, speculative money that can exit quickly during episodes of global uncertainty.

Experts see this revival of Rajan-era tools as a tactical and timely response to current pressures, particularly as the rupee contends with global headwinds like tightening US Federal Reserve policies and emerging market sell-offs. By adopting measures that were proven effective during the 2013 crisis, the RBI aims to bolster investor confidence and signal its commitment to currency stability.

However, the RBI faces a delicate balancing act. While higher interest rates and attracting foreign currency deposits can support the rupee, aggressive hikes may impact economic growth. The central bank’s current approach reflects a calibrated strategy—a combination of policy tools designed to break the negative cycle of depreciation expectations, boost foreign exchange reserves, and maintain overall financial market health.

In summary, the RBI’s revival of Raghuram Rajan’s taper tantrum playbook highlights both the challenges and ingenuity involved in managing India’s currency and capital flows amid global volatility. By incentivizing NRI dollar deposits and absorbing associated costs, the RBI is making a strategic push to attract stable foreign currency into the economy—a move that could provide much-needed relief for the rupee and the broader financial system.

For investors and market watchers, this development underscores the active role of the RBI in safeguarding economic stability and the importance of global cues in shaping India’s financial landscape.