Economy

Capital Wars: Is India's Forex Cushion Thick Enough?

The RBI's NRI deposit scheme pulled in a record $132.98 billion, yet forex reserves just saw their biggest weekly fall. T.N. Ninan warns that rich countries may next restrict capital itself. What that means for India.

Jasvin Thinks2026-10-0410 mins

Capital Wars: Is India's Forex Cushion Thick Enough? — The Reserve Bank of India tower seen from Mumbai harbour.

India's foreign exchange reserves fell by $18.3 billion to $747.6 billion in the week ended 25 September 2026, the biggest weekly fall on record. This came weeks after the Reserve Bank of India (RBI) raised a record $132.98 billion from non-resident Indians through a special deposit scheme. On 30 September, columnist T.N. Ninan warned in Business Standard of a larger risk: after curbs on migration and trade, rich countries may next restrict the movement of capital. His advice is that India should build a thicker cushion now.

What is a capital war, and is India prepared for one?

A capital war is a contest between countries for scarce global savings, fought with tools such as capital controls, sanctions and pressure to invest. India has a large cushion: reserves of $747.6 billion and a record $132.98 billion raised from NRI deposits in 2026. But the cushion is partly borrowed, the rupee has fallen 13%, and reserves dropped $38 billion in three weeks of September. Analysts advise more reserves, lower deficits and debt, and a better investment climate.

Today, he is coercing inflow. Tomorrow, he may squeeze outflow.
T.N. Ninan on US President Donald Trump, Business Standard (30 September 2026)

What Actually Happened?

On 5 June 2026 the RBI announced a special US dollar-rupee swap facility, which opened on 8 June. It covered fresh FCNR(B) deposits of three to five years, external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCBs). The RBI said the aim was to strengthen the balance of payments and incentivise capital inflows. Eligible deposits were also exempted from the cash reserve ratio and the statutory liquidity ratio.

Money poured in. Deposits under the facility had reached $52.3 billion by 13 August, and the RBI advanced the FCNR(B) deadline from 30 September to 31 August. By 18 September, total inflows stood at $143.596 billion. FCNR(B) deposits made up $132.98 billion of this, OFCBs $5.32 billion and ECBs $5.296 billion. The window for ECBs and OFCBs stays open until 31 December 2026.

Reserves recovered from $666.9 billion in the week ended 26 June to an all-time high of $785.7 billion in the week ended 4 September. Then they fell for three straight weeks, losing about $38 billion, as the RBI sold dollars to support the rupee. On 1 October the rupee closed at 96.31 per dollar, Brent crude crossed $100 a barrel, and the US 10-year Treasury yield touched 5.34%, its highest since 2002.

India's forex reserves, June to September 2026 ($ billion)

26 Jun	666.9
4 Sep (peak)	785.7
11 Sep	780.8
18 Sep	765.9
25 Sep	747.6

Source: RBI Weekly Statistical Supplement, as reported by Business Standard (September-October 2026)

How the FCNR(B) Swap Works

An FCNR(B) account, short for Foreign Currency Non-Resident (Bank), lets an NRI keep a deposit in a foreign currency such as the dollar. It differs from an NRE deposit, where the money is converted into rupees. Under the 2026 facility, a bank sells the deposited dollars to the RBI and agrees to buy them back later at the same exchange rate. The swap covers only the principal, not the interest.

An NRI places dollars in a three-to-five-year FCNR(B) deposit with an Indian bank
The bank sells those dollars to the RBI under the special swap and receives rupees
The RBI's foreign exchange reserves rise; the bank lends the rupees
At maturity the bank returns the rupees and gets the dollars back at the same exchange rate
The bank repays the NRI in dollars; the RBI carries the exchange-rate risk in between

Because the RBI absorbs the hedging cost, banks could offer NRIs much higher returns. Economist Ranjit K. Pattnaik, writing for The Billion Press, puts the rates at 6-7.5%, against 3-4% historically. That generosity is why Ninan calls the scheme a huge free lunch for non-resident Indians. He estimates the cost to the RBI at $10 billion to $20 billion, depending on how the rupee moves.

Ninan's Argument: From Trade War to Capital War

Ninan sees a sequence. The retreat from globalisation first restricted the movement of people, through migration curbs. It then restricted goods, through tariffs. The next step, he argues, could be restrictions by rich countries on the movement of capital. Capital controls have long been normal in developing countries. They would be new for the advanced economies that built the open financial system.

The pressure point is the United States, according to Ninan. US corporate bond issuance has grown 80% in two years as technology firms borrow for investment. The federal deficit is about 7% of GDP. Meanwhile, foreign holdings of marketable US Treasuries have dropped to 30% of the total, from 50% in 2015. China has halved its holdings. Japan, now the largest holder, has also begun to move away.

Central banks are shifting to gold. Ninan notes that gold replaced US government bonds as the largest reserve asset last year, and that its price rose 25% in a year. The Netherlands moved 78 tonnes of gold from New York to London in recent months. France moved all its gold out of the United States, and there are calls in Germany to do the same.

Governments with heavy debt have one more escape route: inflation, which shrinks the real value of what they owe. Ninan compares inflation over the last five years with the previous decade. It was more than twice as high in the US, three times as high in Europe and five times in Japan. He also notes that Trump has already made investment commitments a part of some bilateral trade deals.

Concept: Capital Account and Capital Controls

The balance of payments has two main parts. The current account records trade in goods and services, income and remittances. The capital account records investment and borrowing flows such as foreign direct investment, portfolio investment, external loans and NRI deposits. India has full convertibility on the current account but only partial convertibility on the capital account. The Tarapore Committee examined a road map to fuller capital account convertibility in 1997 and again in 2006.

Capital controls are limits on how much money can cross a border, and on what terms. Economists link them to the impossible trinity: a country cannot have free capital movement, a fixed exchange rate and an independent monetary policy all at once. India's partial controls give the RBI room to manage the rupee. If rich countries start using controls too, the supply of capital to emerging markets could shrink.

How Did We Get Here?

1998 Resurgent India Bonds, launched by SBI after sanctions that followed the Pokhran nuclear tests, raise $4.23 billion from NRIs.
2000 India Millennium Deposits, also through SBI, raise $5.5 billion at an 8.5% return.
2013 During the taper tantrum, an RBI swap window brings in about $26 billion of FCNR(B) deposits; these are repaid in 2016.
June 2026 Amid the West Asia crisis and portfolio outflows, the RBI opens a special swap facility for FCNR(B) deposits, ECBs and OFCBs.
August 2026 Inflows far exceed expectations; the FCNR(B) window closes on 31 August, a month early.
4 September 2026 Forex reserves touch an all-time high of $785.7 billion.
25 September 2026 Reserves record their biggest weekly fall, of $18.3 billion, to $747.6 billion.

NRI money raised in four episodes of external stress ($ billion)

Resurgent India Bonds (1998)	4.23
India Millennium Deposits (2000)	5.5
FCNR(B) swap (2013)	26
FCNR(B) swap (2026)	132.98

Source: RBI; Business Standard; Ranjit K. Pattnaik, The Billion Press

Was the Scheme Too Generous?

Critics raised two objections, which Ninan records. First, reserves were already comfortable, unlike in the Resurgent India Bond and Millennium Deposit years. They stood at $682.3 billion on 29 May 2026. Second, the terms were needlessly generous. Ninan finds the second argument stronger than the first. Even so, he backs a precautionary build-up of reserves in an uncertain world.

Pattnaik is sharper. He calculates that outstanding FCNR(B) deposits jumped from $33.756 billion to $166.736 billion, nearly five times the 2013 obligation. Interest paid to NRIs could be about $8.5 billion a year, against roughly $5 billion earned on the reserves. The net cost of about $3.5 billion a year adds to the current account deficit. The swaps also released about ₹11 lakh crore of rupee liquidity, which the RBI must absorb.

There is also a question of where the dollars went. Ninan notes that reserves rose by a little over $50 billion between end-February and end-August. About $130 billion came in as FCNR(B) deposits over the same period. The gap of roughly $80 billion points to heavy dollar sales to defend the rupee, though valuation changes also affect the total. The rupee still fell 13%.

Connect the Dots

US firms and the US government borrow heavily at the same time, while foreign buyers of US bonds step back
US interest rates climb to two-decade highs, pulling capital out of emerging markets
Portfolio investors leave India and oil prices rise; the rupee falls 13% despite RBI intervention
The RBI offers NRIs generous FCNR(B) terms and raises a record $132.98 billion
Reserves hit a record, then fall $38 billion in three weeks as the RBI defends the rupee
If rich countries now restrict capital outflows, borrowed cushions become costlier, so India needs stronger fundamentals

RBI: Data on forex inflows via FCNR(B) deposits, ECBs and OFCBs under the swap facility (Official RBI press release with the scheme dates and inflow figures)
India's Current Account Deficit: When Does Red Become Dangerous? (Our deep dive on the current account side of the same story)
RBI Tightening Turn: Repo Hike Bets and WMA Reform (How the rupee and inflation are shaping interest rate expectations)

The Debate

View	Core argument	Evidence cited
Necessary insurance	In an uncertain world, a bigger reserve cushion is worth paying for	Portfolio outflows, a 13% fall in the rupee and the risk of a capital war (Ninan)
RBI's stated case	The scheme strengthens the balance of payments and attracts capital inflows	Record $143.6 billion of inflows; reserves at an all-time high of $785.7 billion on 4 September
Too generous	The same money could have been raised on less costly terms	Inflows were twice the expected amount; cost to the RBI of $10-20 billion (Ninan)
Unnecessary debt	Reserves were already comfortable, and borrowed reserves must be repaid	Reserves of $682.3 billion before the scheme; about $3.5 billion a year in net interest cost (Pattnaik)
Fix the fundamentals	Lasting security comes from lower deficits and debt and from investment-led inflows	Ninan's call to cut the budget deficit and government debt and improve the investment climate

What Could Happen Next?

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Why Does It Matter for India?

Area	Why it matters
Rupee	A weaker rupee raises the cost of imported oil and feeds inflation
External debt	FCNR(B) deposits are debt; interest of about $8.5 billion a year flows out, and the principal falls due in three to five years (Pattnaik)
Banking liquidity	The swaps released about ₹11 lakh crore into banks, which the RBI must absorb at a cost
Fiscal policy	Lower deficits and debt make a country less dependent on foreign capital
Investment	Stable foreign direct investment is a safer source of dollars than deposits that can leave

What Should We Watch?

1. Weekly reserves: whether the fall from the 4 September peak continues in the RBI's Friday data.
2. The rupee: whether it holds near 96 per dollar as crude stays above $100 a barrel.
3. US Treasury yields: a 10-year yield above 5% keeps pulling money out of emerging markets.
4. ECB and OFCB inflows: the swap window for these stays open until 31 December 2026.
5. Repayment planning: how the RBI prepares for FCNR(B) redemptions due between 2029 and 2031.

Bottom Line

India ends September 2026 with large reserves and a record vote of confidence from its diaspora. Yet the rupee has fallen 13%, and $38 billion of reserves went in three weeks. Ninan's warning is that the world is moving from trade wars to a contest for capital. In such a world, reserves matter, but sound public finances and an attractive investment climate matter more.

Key Terms

FCNR(B) deposit — A term deposit that an NRI holds with an Indian bank in a foreign currency. Example: the $132.98 billion raised between June and August 2026.
Forex swap — A deal to exchange two currencies now and reverse the exchange later. Example: banks sold dollars to the RBI for rupees and will buy them back at the same rate.
Capital controls — Rules that limit money moving into or out of a country. Example: India's limits on how much residents can invest abroad.
Capital account convertibility — Freedom to convert rupees into foreign currency for investment purposes. India allows it only partially.
Forex reserves — Foreign assets held by the RBI: foreign currency assets, gold, SDRs and the IMF reserve position. Example: $747.6 billion on 25 September 2026.
Impossible trinity — The rule that a country cannot have free capital flows, a fixed exchange rate and independent monetary policy together.
External commercial borrowing (ECB) — A loan raised by an Indian company from a lender abroad.
Sterilisation — Central bank action to absorb extra rupees created when it buys dollars. Example: the RBI absorbing liquidity released by the swaps.

Practice Question (Mains-Style)

Q. Foreign exchange reserves built through non-resident deposits provide comfort but not security. Discuss in the context of India's 2026 FCNR(B) swap scheme and the risk of capital controls by advanced economies. (250 words, GS Paper III)