MUMBAI: India's central bank is studying ways to mobilise dollar inflows to bolster its foreign exchange buffers and cushion rising pressure on the rupee from a spike in oil prices driven by the Iran war, three sources familiar with the discussions told Reuters.
The rupee has slumped 5.5% this year, sliding to an all-time low of 95.33 per dollar last Thursday, while foreign exchange reserves have fallen from a peak of $728.5 billion and equity outflows have hit $19 billion over March and April alone.
The Reserve Bank of India (RBI) has maintained it is comfortable with its reserves - enough to cover 11 months of imports - but the latest policy discussions underscore fresh urgency to bolster defences amid capital outflows.
The discussions at the central bank have not been previously reported, though analysts have speculated about how authorities might resurrect elements of their crisis-era playbook.
Among the steps being considered is reviving a mechanism last used in 2013 to draw in dollar deposits from non-resident Indians, two of these sources said. A second option being discussed is eliminating withholding tax on overseas government bond investors to encourage flows, they said.
No final decision has been taken, and any move would be made in consultation with the government, the third source said. Reuters could not establish when a decision would be taken.
"Both are under serious consideration," the source added, noting that the final decision on taxation rests with India's federal finance ministry.
The sources declined to be identified since they are not authorised to speak to the media. An email to the RBI and the federal finance ministry seeking comment was not immediately answered.
The war between the U.S., Israel and Iran - now in its third month - has weakened the Indian currency, adding to a near 5% fall in 2025.
The two measures under consideration could help draw in dollars from overseas.
The deposit scheme was used to stabilise the rupee in 2013 and brought in about $26 billion at a time when U.S. interest rates were close to zero. At the time, the central bank allowed banks to swap dollars raised via such deposits at concessional rates.
The second option under discussion is removing a 5% withholding tax charged to foreign investors in Indian government bonds, which could encourage inflows, the sources said.
Foreign investors were net buyers of Indian government bonds in 2025, investing about $6.5 billion, but that momentum has cooled in 2026, with inflows of only around $1.1 billion so far this year as sentiment turned more cautious after the Iran conflict.
Equity outflows have accelerated, taking cumulative 2026 withdrawals to about $20.6 billion - exceeding outflows for all of 2025.
The measures will primarily help bolster foreign exchange reserves and steady the rupee as well, one of the sources said.
The central bank has already clamped down on arbitrage trades by banks while nudging oil companies to reduce dollar purchases in the spot market to support the rupee. However, its performance is in line with oil-importing Asian peers.
PRESSURE ON FOREX RESERVES
India has more than doubled its foreign exchange reserves since 2013, when its currency came under pressure along with other emerging markets after the U.S. Federal Reserve announced plans to taper its quantitative easing programme.
India's reserves are currently at $698 billion, which RBI Governor Sanjay Malhotra described as "adequate" in a speech over the weekend.
Reserves, however, have fallen from a peak of $728.5 billion, and analysts caution that the headline figure overstates the RBI's immediate firepower, given its $104 billion in short dollar forward commitments.
The RBI has intervened heavily in the spot and forward FX market to slow the decline in the rupee.
The share of gold in forex reserves has also risen, reducing the available foreign currency assets, said Vivek Kumar, economist at Mumbai-based QuantEco Research.
"The effective holding of foreign currency assets stood at $449 billion in March (2026)," Kumar said.
"Persistence of the Middle East crisis could further dent the import cover," said Kumar, adding that this could require policy measures to reduce the trade deficit and encourage capital inflows.
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The Reserve Bank of India (RBI) has maintained it is comfortable with its reserves - enough to cover 11 months of imports - but the latest policy discussions underscore fresh urgency to bolster defences amid capital outflows.
The discussions at the central bank have not been previously reported, though analysts have speculated about how authorities might resurrect elements of their crisis-era playbook.
Among the steps being considered is reviving a mechanism last used in 2013 to draw in dollar deposits from non-resident Indians, two of these sources said. A second option being discussed is eliminating withholding tax on overseas government bond investors to encourage flows, they said.
No final decision has been taken, and any move would be made in consultation with the government, the third source said. Reuters could not establish when a decision would be taken.
"Both are under serious consideration," the source added, noting that the final decision on taxation rests with India's federal finance ministry.
The sources declined to be identified since they are not authorised to speak to the media. An email to the RBI and the federal finance ministry seeking comment was not immediately answered.
The war between the U.S., Israel and Iran - now in its third month - has weakened the Indian currency, adding to a near 5% fall in 2025.
The two measures under consideration could help draw in dollars from overseas.
The deposit scheme was used to stabilise the rupee in 2013 and brought in about $26 billion at a time when U.S. interest rates were close to zero. At the time, the central bank allowed banks to swap dollars raised via such deposits at concessional rates.
The second option under discussion is removing a 5% withholding tax charged to foreign investors in Indian government bonds, which could encourage inflows, the sources said.
Foreign investors were net buyers of Indian government bonds in 2025, investing about $6.5 billion, but that momentum has cooled in 2026, with inflows of only around $1.1 billion so far this year as sentiment turned more cautious after the Iran conflict.
Equity outflows have accelerated, taking cumulative 2026 withdrawals to about $20.6 billion - exceeding outflows for all of 2025.
The measures will primarily help bolster foreign exchange reserves and steady the rupee as well, one of the sources said.
The central bank has already clamped down on arbitrage trades by banks while nudging oil companies to reduce dollar purchases in the spot market to support the rupee. However, its performance is in line with oil-importing Asian peers.
PRESSURE ON FOREX RESERVES
India has more than doubled its foreign exchange reserves since 2013, when its currency came under pressure along with other emerging markets after the U.S. Federal Reserve announced plans to taper its quantitative easing programme.
India's reserves are currently at $698 billion, which RBI Governor Sanjay Malhotra described as "adequate" in a speech over the weekend.
Reserves, however, have fallen from a peak of $728.5 billion, and analysts caution that the headline figure overstates the RBI's immediate firepower, given its $104 billion in short dollar forward commitments.
The RBI has intervened heavily in the spot and forward FX market to slow the decline in the rupee.
The share of gold in forex reserves has also risen, reducing the available foreign currency assets, said Vivek Kumar, economist at Mumbai-based QuantEco Research.
"The effective holding of foreign currency assets stood at $449 billion in March (2026)," Kumar said.
"Persistence of the Middle East crisis could further dent the import cover," said Kumar, adding that this could require policy measures to reduce the trade deficit and encourage capital inflows.
