Forex reserves at record highNot only that, the structure also allowed NRIs to borrow substantially more than the amount deposited. In some cases, borrowing could be as much as 19 times the deposit, with the borrowed funds placed as FCNR(B) deposits.

This has led to India’s forex reserves touching new records even amid the conflict. The scheme revived a strategy used during the 2013 taper tantrum, when a similar window attracted about $26 billion and helped fuel a sharp rupee rally.

The latest scheme was so successful that RBI ended the FCNR window a month earlier than announced. What it means for IndiaExperts attribute a large part of the increase in forex reserves to RBI’s swap window.

The added cover works well in the current economic situation, providing an important buffer from external shocks. “The swap facility has been responsible for the bulk of the recent reserve rebuilding, though the extent of lift is lower than the scale of inflows, implying some offset through intervention and balance-sheet adjustments,” says Radhika Rao, Senior Economist and Executive Director at DBS Bank.

According to Rao, the rise in reserves strengthens India's capacity to manage an oil shock, even if it does not fundamentally alter the economy's dependence on imported energy. How India mopped up dollars“FCNR deposits are usually medium-term liabilities and thereby a more durable form of financing.

Importantly, the increased forex reserves amid global turmoil provide confidence to investors and also keeps the speculators at bay knowing the RBI has the firepower to intervene if there is excessive speculative trade. “The export margins on refined petroleum products have increased significantly and we are getting some cushion from the exports of these products given the hit on foreign refining capacity.

“The FII outflows have ebbed, FDI is improving, investments are growing and given markets have been subdued for almost 2 years, the valuations are normalising. Hence, the forex reserves are unlikely to face any immediate outflow concerns,” he adds.

“Forex reserves were already quite strong covering 10-11 months of imports and hence were resilient. Adding these dollars just makes the position much stronger.

He adds that the current cushion is durable for at least a year, helping greatly in cushioning the blow. “We have been having a negative balance of payments in the last couple of years.

This will make it positive,” he said. Rupee on upward curveWith record inflows reported, the rupee has appreciated to hit a two-month high.

Experts believe that had the window not existed, rupee’s depreciation would have been more rapid. 48 against the dollar, marking its highest level in two months.

The rupee’s appreciation followed the RBI’s disclosure on Wednesday that its special initiative to attract foreign currency deposits from non-resident Indians had generated several billion dollars of inflows. “It may be noted that the pressure on the rupee is driven by market forces, the balance between imports and exports of goods and services, net flow of capital and global crude prices.

RBI does not aim to intervene in correcting the direction of change of the exchange rate which is determined by these broader forces. At best, it tries to contain the volatility of the INR/$.

Rupee vs Dollar: Up upward curveCaution ahead? The US-Iran war is far from over and India is still importing energy needs such as crude oil, LPG, and LNG at high prices.

Foreign investors are still pulling out money and the global economic headwinds continue. India’s forex cover has grown, which provides the economy with a credible external sector shield.

But, the road ahead may continue to be bumpy in lieu of continued external pressures. DK Srivastava strikes a cautious stance.

“Thus, the present level of forex reserves was already achieved earlier when the balance of trade was more favourable. Some experts have also flagged the eventual hedging cost for RBI.

But reports suggest that the government expects the central bank to face limited material costs from the swap facility. While economists have estimated that hedging could cost the RBI around 3% of roughly Rs 12 lakh crore, or Rs 36,000 crore, policymakers believe the returns from investing the dollars in US Treasuries could offset these costs.

Even as the reserves touch record high, PM Modi has urged Indians to continue preserving forex. He has asked people not to go for foreign holidays, host weddings abroad, or buy gold unless necessary.

And that itself is indicative of the government’s measured approach despite economic resilience.

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