Record Diaspora Inflows Bring a New Challenge for RBI as Costs Come Into Focus

India’s record diaspora fundraising drive has delivered a large pool of foreign currency at a crucial time for the rupee. But with the inflows coming in much stronger than expected, attention is now shifting from how much money was raised to what managing that money could cost the Reserve Bank of India. 

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Economists estimate that the central bank could face a potential $10.6 billion price tag from the exercise. The RBI’s special deposit programme attracted significantly more funds than anticipated, and inflows could rise further once overseas foreign-currency debt and external commercial borrowings are included. 

The programme was introduced through a special window in June as the RBI sought to protect the rupee after it had fallen to record lows. 

Why the Inflows Come With a Cost 

A major part of the equation is the Foreign Currency Non-Resident (Bank), or FCNR(B), programme. 

Under the programme, the RBI offered banks a favourable currency-swap facility that protects them against losses if the rupee depreciates. The facility is estimated to cost the central bank around 3% to 3.5% annually. 

There is another challenge. When banks exchange the dollars they have raised for rupees, additional cash enters the domestic banking system. The RBI may need to absorb some of this excess liquidity. 

Madhavi Arora, economist at Emkay Global Financial Services, estimates that these two operations together could cost as much as ₹1.2 trillion, or $12.7 billion, over five years. 

The RBI did not immediately respond to a request for details on the cost, according to the report. 

RBI’s Forex Reserves Provide a Buffer 

Despite the potentially large bill, the cost is not currently viewed as a major concern within the RBI, according to a person familiar with the central bank’s thinking. 

One important factor will be how the dollar proceeds are ultimately invested. 

Repayment is also not expected to pose a major challenge. India’s foreign-exchange reserves currently stand at around $730 billion and are expected to increase over the coming years, providing a buffer against the amount raised through the programme. 

Could RBI’s Dividend to the Government Be Hit? 

The financial implications could extend beyond the central bank’s own balance sheet. 

One potential risk is a reduction in the dividend the RBI transfers to the government. The central bank paid a record ₹2.87 trillion dividend in May, up from ₹2.69 trillion a year earlier. 

If the costs associated with the deposit programme eventually reduce the dividend, it could make meeting the government’s budget targets more difficult. 

This makes the way the funds are deployed particularly important. Emkay Global’s Arora said the money needs to be used judiciously and productively to reduce the direct and indirect fiscal costs associated with the exercise. 

Investing the Dollars Could Offset the Expense 

There is also a scenario in which the headline cost becomes considerably more manageable. 

The RBI could invest the dollars it has received in overseas assets. The report notes that if the proceeds were invested in 10-year US Treasuries yielding around 4.7%, the interest earned could exceed what the central bank spends on hedging. 

Gaura Sengupta, economist at IDFC First Bank, estimates that the RBI’s net annual cost could fall to around ₹10,000 crore — or potentially even turn marginally positive. 

That makes the final financial impact far less straightforward than the headline cost might suggest. 

The diaspora fundraising programme has brought substantial foreign-currency inflows at a time when the rupee needed support. Now, with the money raised exceeding expectations, the RBI faces a different task: managing the resulting liquidity, hedging costs and investments in a way that limits the eventual burden on its balance sheet and the government’s finances.