Explainer: What the deluge of dollars means for the economy

What has been the impact of dollar flows on the rupee?

The Indian currency has gained enormously from the large dollar flows. It was partly to stem the sharp slide in the currency that the Reserve Bank of India (RBI) decided to attract dollar inflows via a special deposit scheme. In late May the rupee had fallen to levels of nearly 97 against the dollar weighed down by a strong dollar, elevated crude oil prices, and the geopolitical hostilities in West Asia.

Post the rollout of the foreign currency non-resident (bank) or FCNR (B) deposit and other schemes, the rupee has appreciated against the greenback. The gains in the early phase post the launch of the special schemes, were muted. While the rupee has been on firmer ground in August, it has not appreciated to the extent that it did in 2013 when similar dollar deposit schemes were launched. This is due to continuing geopolitical risks and weaker capital flows.

The central bank continues to support the currency which ended Tuesday’s session at 94.95.

Impact on RBI’s reserves kitty and forex operations

Foreign exchange reserves rose from around $294 billion in 2013 to a peak of nearly $729 billion in February 2026. In the week to August 21, the reserves climbed to $729.33 billion boosted by dollar inflows and some revaluation gains as the dollar index weakened.

However, the addition to the reported reserves may appear modest as the RBI holds a significant stock of forward foreign exchange sale obligations. Its outstanding net short position, which was $89 billion in February 2025, moved to around $136.8 billion by July 2026, revealing increased reliance on the derivatives market to contain rupee volatility.

Armed with dollars, the RBI has decided to switch to a more regular pattern of intervention to support the currency over the past month, say experts. Previously, the RBI would step in largely to curb bigger swings. On one occasion, it spent $7 billion in a day intervening in onshore and offshore markets.

How have the dollar inflows impacted liquidity?

The large dollar inflows have, expectedly, led to a surge in liquidity. System liquidity averaged Rs 3.57 lakh crore in August, compared to Rs 1.07 lakh crore in July; last Sunday, the surplus shot up to Rs 5.04 lakh crore. The impact of abundant liquidity can be seen in the rates in the money market.

With the bigger banks, which have been able to garner more FCNR (B) deposits, virtually out of the market, CD rates have come off helping smaller banks raise funds at lower rates. Dollar inflows will give banks stable medium-term deposits, lowering funding costs and also the loan-deposit ratios.

A three-year FCNR (B) deposit priced at around 6.5% compares favourably with domestic term deposits offering around 7.45%. Also, fresh FCNR (B) deposits will not attract CRR and SLR requirements. To be sure, FCNR (B) deposits would account for just about 3% of total deposits, limiting the impact on funding.

Could excess liquidity be an issue for the RBI?

Excess liquidity if it stays in the system for a long period, could stoke inflationary pressures. The capital flows will boost core liquidity, potentially adding over Rs 8 lakh crore by one estimate.

While some of this could be partly offset by a seasonal rise in demand for currency, and the maturing of the RBI’s short forward book, the currency in circulation could rise by about Rs 1 lakh crore in December over levels in June. The possible glut in liquidity in H2FY27 could compel the RBI to consider a hike in CRR later in the year.

Over the past fortnight or so, the central bank has been conducting VRRR or Variable Rate Reverse Repo auctions to drain out liquidity. On Monday, for instance, the RBI held VRRR auctions to try and soak up Rs 10 lakh crore— across varying tenures. However, the response was lukewarm as banks parked just Rs 3.84 lakh crore with the RBI.

Impact on the Balance of Payments

Going by the trend so far, the measures taken by the RBI are likely to see dollar inflows of well over $100 billion. Consequently, India’s capital account surplus is now estimated to increase to more than $110 billion in the current year.

As a result, the Balance of Payments (BoP) is expected to end FY27 in a surplus of an estimated $65-70 billion — earlier, there were apprehensions it could end up in a deficit. This would be an improvement over the BoP deficits of $23.6 billion and $5 billion in FY26 and FY25, respectively.

Already, the current account deficit for Q1FY27 has widened to $4.2 billion compared with $3.4 billion in Q1FY26. If crude oil prices stay elevated and imports of gold continue at the current pace, merchandise deficits could remain high.

As such, the large capital flows that leave the BoP in a surplus would strengthen the country’s external position giving the government a substantial buffer to combat any exigencies in an uncertain world.