One of post-reform India's greatest strengths has been its ability to navigate major macroeconomic crises with remarkable resilience. Whether it was the East Asian currency crisis of 1997, the sanctions following the Pokhran nuclear tests in 1998, the Global Financial Crisis of 2008, the taper tantrum of 2013 or the economic disruption caused by Covid-19, India has repeatedly demonstrated an ability to innovate and respond without derailing its long-term growth trajectory.

The Reserve Bank of India's latest initiatives on FCNR deposits and ECBs, announced alongside the June Monetary Policy Committee statement, deserves to be viewed in the same light.

The Indian foreign exchange market has been under pressure in recent months. Persistent foreign portfolio outflows, followed by geopolitical tensions in West Asia and the spike in crude oil prices after the US-Israel/Iran conflict, put renewed downward pressure on the rupee. As expected, the RBI intervened by selling dollars to smooth excessive volatility, consistent with its long-held policy of ensuring orderly market conditions rather than defending any specific exchange rate.

Over several decades, the RBI has earned a reputation as one of the world's most credible central banks in managing external sector shocks. Former Governor D Subbarao often described it as a "full-service central bank"—a description reflected in its ability to balance inflation, growth, financial stability and external sector management. It is no surprise that Nobel laureate Joseph Stiglitz once remarked that had the United States been led by a central banker like Y V Reddy during the 2008 crisis, its economy would have fared far better.

The RBI’s latest intervention under Governor Sanjay Malhotra continues that tradition. Every external crisis presents a unique challenge, and there are rarely textbook solutions to rapidly evolving geopolitical and geo-economic events. The RBI's latest response demonstrates both innovation and agility.

The central bank has announced that it will bear the entire swap cost on fresh FCNR(B) deposits of three to five years mobilised until September 2026. It has also offered concessional swap support for eligible external commercial borrowings raised by banks and government-linked entities.

The significance of these measures lies in their incentives. By absorbing the swap cost, the RBI has enabled banks to offer substantially higher returns on FCNR deposits. Simultaneously, the concessional swap facility has encouraged overseas borrowings by Indian financial institutions and public sector companies. Initial reports suggest that these measures have already attracted sizeable inflows/promises within days of their announcement.

The most innovative and matching response, however, came from SBI. The country's largest lender has introduced a leveraged FCNR deposit product for non-resident Indians investing a minimum of US$100,000. Through an associated overseas borrowing arrangement, the deposit is effectively leveraged to bring in another US$ 900,000 allowing eligible investors to earn returns of up to 11.25 per cent over five years with minimal additional risk. The product exploits the differential between overseas dollar borrowing costs and FCNR deposit rates in India—a market opportunity that has existed but has now become significantly more attractive because the RBI is absorbing the swap cost.

However, some NRIs have raised the question how this return is possible, in a spirit of understanding the product dynamics. The scepticism is understandable. Yet the economics are straightforward. Banks convert foreign currency deposits into rupees for domestic lending by undertaking currency swaps. With the RBI now bearing this swap cost, banks can pass on a substantial part of the resulting benefit to depositors while simultaneously strengthening their own liability base. The RBI has also clarified leveraging these deposits to bring in more dollars and give higher return thereby to NRI depositors is in order.

This is particularly significant for states such as Kerala, Tamil Nadu and Maharashtra, which account for a substantial share of India's NRI deposits. Even customers not opting for the leveraged product are likely to benefit from improved FCNR deposit rates.

The policy delivers multiple gains. NRIs receive higher returns without any significant additional risk. Banks obtain a valuable source of deposits at a time when credit growth has consistently outpaced deposit growth. Most importantly, the country strengthens its foreign exchange reserves at a time of global uncertainty.

Market estimates suggest that these measures could potentially attract between US$50 billion and US$70 billion over time. Whether or not the eventual inflow reaches those levels, the larger achievement lies elsewhere. The RBI has once again demonstrated its capacity to respond imaginatively to evolving global challenges, while Indian banks like SBI have shown equal agility in translating policy into innovative financial products.

In an uncertain world, institutional credibility is often a nation's greatest economic asset. This latest initiative has reinforced that credibility once again.