MONEYCONTROL PRO PANORAMA | CHASING DOLLARS, CATCHING PAIN

Dear Reader, 

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

The Reserve Bank of India had laid a red carpet for dollars through banks in June. What followed was a stampede of foreign currency non-resident bank deposits. At $127 billion, the FCNR scheme of 2026 trounces that of 2013 when the RBI first experimented with it. That the central bank now has a problem of plenty would be an understatement.

As we wrote on August 25, the dollars come at a steep price for the RBI. The smallest item on its bill is the hedging cost that it would pay out of its pocket to banks. Other items are now becoming apparent in their impact.

The immediate problem is that of the colossal liquidity surplus of nearly Rs 10 trillion that the scheme has brought in. Overnight money rates have fallen sharply below the RBI’s repo rate, and interest rates on short-term borrowings have seen a sizeable fall. For instance, rates on certificates of deposits have crashed about 60-70 basis points because banks don’t need to chase bulk deposits anymore and there is more than enough liquidity around. Treasury bill cutoffs have reduced by 30-35 bps since the FCNR scheme was announced in June and are being priced at policy repo rate now. A basis point is one hundredth of a percentage points.

At a time when credit growth is 18 percent and still driven by retail consumption, too much liquidity is a spark that could light up speculative lending. Some banks are already giving out structured mortgages and other products to put the mountain of money to work.

This is why economists are now flagging off the urgent need for liquidity measures. The RBI has many to use from, but none of them can be used without causing some disruption to the markets. The RBI must decide two key things. One, does it want to reduce the quantity of liquidity or does it want to just increase the price of it. Second, how much disruption to the market can the central bank allow.

Each of the tools prescribed by market analysts carries a disruption potential. A variable reverse repo rate (VRRR) auction is least disruptive, but perhaps may not be effective in mopping up durable liquidity. A CRR hike would hit banks disproportionately and according to size and may end up penalising those banks that did not bring in a lot of dollars. Selling government bonds is a contentious move because it invariably drives up long-term yields given that bonds are fungible across the curve.

What the RBI needs is to keep long-term yields benign to support the investment growth, but perhaps drive up short-term interest rates to squash speculative lending that could result in inflation.

Then, there are other innovative ways such as making the CRR temporary or issuance of cash management bills that basically neutralise the liquidity temporarily.

Yet another one is to take the solution from the market for which the scheme was put in place, the forex market. A sell-buy swap by the RBI would remove rupee liquidity and introduce dollars. This would have a knock-on effect of supporting the exchange rate. However, an easy way to suck out rupees and help the exchange rate is to sell dollars outright in the market by spending the beefed-up forex reserves.

That brings us to the curious case of the RBI dialling down its interventions in recent months. The Indian rupee has gained a measly 1 percent since the FCNR measures were announced. Data from the RBI shows that the central bank bought and sold an equal amount of dollars in June. In fact, historically, the RBI has been present on both sides unless flows are volatile, disruptive, and one-sided. Clearly, exchange rate intervention is its own policy.

If the goal of the FCNR deposits was to get firepower to intervene with a side of fixing banking sector deposit problem, these have been achieved. Now, the RBI will need to handle the side effects of the dollar deluge far more deftly than it did on the reserves' replenishment front.

Investing insights from our research team

Weekly Tactical Pick | Goldiam International: Riding the global lab-grown diamond wave

VIP Industries – time to ride the turnaround?

Rainbow Children’s Medicare: Is the company entering the next growth stretch?

What else are we reading?

SEBI eyes settlement price overhaul, post-volatility in CAS regime

Chart of the Day: IBC’s core function improves, but delays continue to be a bother

The IPO boom is back, what could go wrong?

Startup Street | Will SEBI’s wealth test reshape angel investing ecosystem? 

Hugging Face attack is a wake-up call about the risks of AI (republished from the FT)

Why the US and Iran keep escalating (republished from the FT)

Are SCs and STs more vulnerable to crime? What NCRB data reveals about caste-based violence in India

Mahatma Gandhi and the RSS: Revisiting a historical relationship

Miscounted: The cities India still calls villages

Markets

Who were the SIP champions in FY26? ICICI Pru MF, HDFC MF led flows; Nippon MF gained most share

Technical Picks: PIIND, BSE, HCLTECH

We have a crack team of reporters writing on everything startups and tech. We are fans of their newsletter Tech3 that lands in our inboxes every weekday evening. You can catch up on the day's happening tech and startup stories, including news, scoops, and analyses. If you have not already subscribed to it, click on this link to sign up.

Thank you for subscribing to Moneycontrol Pro. Check out our offers page here for exclusive discounts on select brands and giveaways.

We would love to hear from you. For any feedback on the product and suggestions please click here. We promise to read your responses although we might not be able to reply to each one individually.  

Aparna Iyer Moneycontrol Pro  

2026-09-04T09:25:24Z