RBI forex, FAR steps may draw up to $40 bn in 18 months

Rates held steady, but the FX and bond toolkit widened

The Reserve Bank of India (RBI) held policy rates steady on June 5, while rolling out a set of measures aimed at improving foreign capital inflows into India’s currency and fixed-income markets. The steps were positioned as support for the rupee and domestic liquidity conditions at a time when market participants have been watching foreign portfolio flows closely. Analysts and traders described the package as a coordinated attempt to improve the flow of dollars and to make Indian government securities easier to own for global investors.

Market participants said the measures could help shore up inflows into the country and support investment activity across currency and debt markets. While some moves were designed to broaden the government bond investor base, others focused on lowering hedging costs and encouraging overseas fundraising and foreign-currency deposits.

Fully Accessible Route expanded to ultra-long government bonds

A key bond-market measure was the extension of the Fully Accessible Route (FAR) to ultra-long tenors of government bonds, specifically 15, 30, and 40 years. The RBI also removed investment caps on other government securities. Together, these changes are aimed at easing access for foreign investors and improving the depth of longer-duration trading.

Kunal Sodhani, Head of Treasury at Shinhan Bank, said the cumulative impact of the measures could potentially attract $10 billion to $10 billion of incremental foreign inflows over the next 12 to 18 months. He added that such flows could provide meaningful support to the rupee, foreign exchange reserves, and the government borrowing programme.

Lavanya Venkateswaran, a senior economist at OCBC Bank, said the steps send a signal that authorities are open to more foreign bond flows, and that the FAR change would likely work alongside other measures announced.

Swap window for PSUs raising overseas borrowings (ECBs)

To support foreign currency inflows through fundraising channels, the RBI announced a concessional forex swap facility for public sector undertakings (PSUs) raising funds via external commercial borrowings (ECBs). The facility will be available until September 30, 2026.

Market commentary in the provided material also pointed to expected inflows from PSU activity. One expert view in the text flagged $10 billion to $15 billion of potential inflows from the PSU side, linked to the support available for overseas borrowing.

FCNR(B) deposit support and reduced hedging costs

The RBI said it will bear the full hedging cost for authorised dealer banks mobilising fresh three-to-five-year FCNR(B) deposits until September 30 (as per the provided text). This measure is intended to improve the economics of raising foreign-currency deposits and to encourage banks to bring in longer-tenor dollars.

Sodhani said the FCNR(B) swap window and FAR expansion are likely to deliver the “largest and fastest” inflows among the measures announced. Another expert view in the text described expected inflows via ECBs and FCNR deposits as potentially stable, with maturities ranging three to five years.

Export proceeds timeline tightened to nine months

Alongside measures aimed at fundraising and deposits, the RBI proposed restoring the time allowed for realisation of export proceeds to nine months, from the current 15-month window. The change would require exporters to bring foreign currency earnings back to India sooner, which can mechanically improve near-term FX availability.

This step sits within a broader objective described in the material: mobilising dollar inflows to bolster foreign exchange buffers and reduce pressure on the rupee.

What the package includes: a quick fact table

Inflow estimates range from $10 billion to $10 billion

Across the expert comments included, estimates for potential inflows varied by channel and horizon. Sodhani’s estimate cited $10 billion to $10 billion of incremental inflows over 12 to 18 months. DBS Bank’s Ashhish Vaidya told CNBC-TV18 that measures could attract $10 billion to $10 billion of inflows through ECBs, FCNR deposits, and borrowings, with inflows likely to be stable due to longer maturities.

Madhavi Arora, chief economist at Emkay Global Financial Services, said the measures could potentially lead to $10 billion to $10 billion of inflows in the year. Separately, Sakshi Gupta, principal economist at HDFC Bank, said these measures should help bridge a $10 billion to $10 billion balance-of-payments gap estimated for FY27.

Comparison table: what different experts are projecting

Market reaction: positive, but the flow build-up may be gradual

The provided text said the rupee and the 10-year bond yield reacted positively to the RBI’s move. However, it also noted that experts expect a gradual, not immediate, rise in foreign market flows. That pacing matters because several channels depend on actual fundraising plans, bank mobilisation appetite, and investor comfort with hedging costs.

The material also noted that stabilising the rupee could encourage investors to unwind currency hedges, which can interact with near-term FX demand and supply dynamics.

Side-effects and tensions in the onshore FX market

Not all measures were received smoothly. The RBI said it will cap the open positions lenders can hold in the onshore currency market at $100 million per day, forcing them to shrink their books. Banks warned that unwinding positions totalling at least $10 billion could lead to steep losses.

Jefferies analysts said every one-rupee move in the local currency versus the US dollar could lead to a one-time loss of ₹30 billion to ₹40 billion for banks. This highlights the trade-off between tightening risk in onshore FX markets and the potential near-term costs for balance sheets when positions are adjusted.

Why the bond-access changes matter alongside index inclusion

The package comes as investors track India’s path in global bond benchmarks. The provided text also cited analyst expectations that India could attract over $10 billion of inflows over time following inclusion in JPMorgan Chase & Co’s bond index.

A separate thread in the material referenced the potential role of tax changes in improving foreign investor returns on government bonds. Rajesh H. Gandhi, partner at Deloitte India, said a tax exemption could raise FPI returns on Indian government bonds by 15% to 20%, strengthening the case for global bond index participation.

Conclusion: watch the deadlines and the pace of actual mobilisation

RBI’s June 5 decisions kept rates unchanged but broadened the policy toolkit to attract foreign inflows via government bonds, swaps, deposits, and faster export repatriation. Expert estimates in the text cluster around $10 billion to $10 billion of potential inflows, with multiple comments emphasising that flows may build over time rather than arrive immediately.

The next signposts are operational: how quickly banks mobilise three-to-five-year FCNR(B) deposits, whether PSUs use the ECB swap window before September 30, 2026, and whether bond-market access changes translate into sustained foreign participation.