Whalesbook
Rupee Pressure Mounts as Reserves Drop
The Indian rupee is under severe pressure, having depreciated 7.70% against the US dollar over the past year, with analysts predicting further drops to 100 if geopolitical tensions rise. As of April 7, 2026, the USD/INR traded around 93.09. This currency weakness is directly linked to escalating geopolitical conflicts in West Asia, which have pushed crude oil prices past $110 a barrel, driving up India's import costs and inflation worries.
Adding to the pressure, India's foreign exchange reserves have seen a significant drop, falling by over $40 billion in the four weeks to March 27, 2026, to $688.058 billion. This marks a sharp decrease from the record high of $728.49 billion set in February 2026. The Reserve Bank of India (RBI) has reportedly been intervening heavily, selling an estimated $15 billion in March alone to prevent a sharp fall.
RBI Weighs FCNR(B) Deposits: A Costlier Echo of 2013
In response to these mounting pressures, the RBI is reportedly considering reintroducing Foreign Currency Non-Resident (FCNR-B) deposit schemes during its upcoming monetary policy committee review. The goal is to attract foreign currency and help stabilize the rupee. This strategy mirrors the RBI's successful intervention in 2013, which attracted about $30 billion through a special swap at a concessional rate of 3.5%.
However, the economic situation has changed significantly. In 2013, with US interest rates near zero, the cost of such a swap was manageable. Today, with US Federal Funds rates around 3.50%-3.75% and similar pressures on ECB rates, attracting and hedging these deposits is much more expensive. Senior economists noted that "the cost now is much higher given where global/US interest rates are." This suggests any revived FCNR-B scheme would be a far more expensive tool than before, potentially straining the central bank's finances.
Trade Deficits Worsen Currency Pressure
The rupee's weakness is further amplified by persistent trade and current account deficits. India's merchandise trade deficit almost doubled year-on-year to $27.1 billion in February 2026, fueled by a 24.1% rise in imports, particularly gold and silver, while exports fell. This widening gap pushed the current account deficit to an estimated 1.3% of GDP in Q3 FY26.
The conflict in West Asia has intensified these pressures. With key shipping routes like the Strait of Hormuz facing disruptions, Brent crude prices have surged, with forecasts seeing them hit $150 a barrel if disruptions continue. For India, a major energy importer, each $10 rise in crude oil prices could add about $14 billion to the annual import bill, directly pressuring the rupee and domestic inflation.
Concerns Over Cost, Sustainability, and Structural Issues
While the FCNR(B) revival might offer short-term relief, its effectiveness and sustainability are uncertain. Historical data shows a substantial part of the $26 billion raised in 2013 via FCNR(B) came from overseas banks, not purely Non-Resident Indian (NRI) funds. This raises questions about the scheme's ability to attract genuinely sustainable inflows. The higher cost due to current global rates could make this a financially burdensome measure for the RBI.
Furthermore, the FCNR(B) scheme addresses a symptom, not the root cause. The underlying structural issues of a widening trade deficit and reliance on imported energy remain key pressures on the rupee. The currency’s performance also lags regional peers; the Indian Rupee was Asia's weakest currency against the US dollar in FY26, down 9.88%. Many other emerging market currencies also fell, with several dropping over 4% in March 2026.
Outlook: Rate Hold Expected, Focus on Forecasts
The RBI's Monetary Policy Committee is widely expected to keep interest rates steady at 5.25% on April 8, 2026, prioritizing stability amid global uncertainties and domestic inflation risks. Market watchers will closely review the central bank's updated growth and inflation forecasts for FY27, likely reflecting the escalating geopolitical situation and volatile commodity prices. The focus will remain on managing liquidity and inflation in a fragile external environment.