Last Friday, the rupee slipped to a record low of 96.14 against the dollar amid concerns that crude oil prices are unlikely to ease from the $100-a-barrel mark anytime soon. Economists now expect India’s current account deficit to widen to around 2% of GDP this year, up from 1% in FY26 — translating into a gap of roughly $84 billion, and that too assumes oil prices remain below $90 a barrel. Pressure is also building from persistent foreign portfolio outflows from equities, weak participation by overseas investors in bond markets, and subdued net foreign direct investment (FDI). Economists warn that the twin pressures of an oil shock and a stressed capital account could push India’s balance of payments into deficit for a third consecutive year.
Index Inclusion Bottleneck
To bridge this gap and arrest the rupee’s slide, India needs to attract significantly higher foreign capital inflows. Among the measures reportedly under consideration are tax relief for foreign portfolio investors investing in debt markets and new versions of the 2013 Foreign Currency Non-Resident (Bank) or FCNR(B) deposit scheme and the India Millennium Deposits (IMD). Although Indian government bonds are now included in global indices such as JPMorgan Chase and FTSE Russell, foreign investors still hold barely 3% of India’s $1.3-trillion sovereign debt market. High taxation on coupon income, low post-tax hedged returns, and the absence of India from major benchmarks such as the Bloomberg Global Aggregate and FTSE WBGI continue to deter investors. India’s 20% tax on bond income is substantially higher than in many peer markets. Countries like China even offer exemptions or special dispensations for index-linked investments. Experts believe a zero-tax regime could potentially attract $45-50 billion of bond inflows over two years, while also opening the door for global pension and endowment funds.
High-Yield Subsidy Challenge
The FCNR(B) deposit scheme launched during the 2013 crisis was highly successful, mobilising around $26 billion for India. But global conditions are very different today. Dollar interest rates are far higher, meaning any similar scheme would now require banks to offer significantly more attractive dollar yields even as domestic deposit costs remain relatively low. In 2013, the Reserve Bank of India (RBI) had cushioned banks by offering concessional swap windows to hedge foreign exchange risk. Replicating that support today would involve a much larger subsidy burden. Even so, if such a scheme succeeds in attracting long-term deposits with a minimum tenor of three years, the cost may still be justified given the stress on the external account.
The RBI is also understood to be examining a fresh version of the IMD scheme launched in 2000 to tap into NRI sentiment. Back then, state-owned banks had raised funds through five-year bonds denominated in dollars, pounds and euros, offering interest rates of 6.85%-8.5%. Reports suggest the RBI may again provide forex swap facilities to participating banks, though it may be reluctant to subsidise the scheme unless inflows are substantially larger than the $5.5 billion mobilised under the IMD.
Yet, while portfolio inflows and diaspora-focused schemes can provide temporary relief, India’s long-term solution lies in attracting far higher levels of FDI. That will require deeper structural reforms — easier approvals through the automatic route, greater ownership flexibility, policy stability, and a more predictable tax and regulatory environment. Many multinational companies remain wary of red tape, regulatory uncertainty, and the absence of a level playing field. If India wants durable capital inflows, it must become significantly easier to do business here.