Everything Is Fine, Says The RBI. So Why The Emergency Measures?

Six months ago India held $700 billion in reserves against $700 billion of external debt. In three months it will hold $600 billion against $850 billion, and that swap is what is holding the rupee at 95.

The number everyone fears is $330 billion but it is also the wrong number. That figure of $330 billion is the goods trade deficit, and it has become the standard proof that India is in trouble. India exports around $440 billion in goods and imports close to $800 billion - therefore the gap is quite real and there is no denying it. However, goods are one column in a wider account. Add the rest of the columns and the picture actually inverts. India actually ran a current account surplus in the last quarter of the previous financial year. So the country is not living beyond its means. This article is produced based on the latest episode of What This Means where we speak with Professor Prasanna Tantri, Associate Professor of Finance at the Indian School of Business on how the RBI is holding the rupee steady by inviting in short-term money it will have to repay in two-three years, and why that trade looks like emergency medicine for a patient that is not sick. Here's How: The Ledger Everyone Reads Wrong Services: Look at services, the part the government rarely celebrates. India now exports around $420 billion in services against $200 billion of imports, a surplus of $210 billion. Only the US runs a bigger one. China runs a deficit here. A decade ago services exports were a third of goods exports. They are now almost level with them, and the government still treats manufacturing as the only real economy. Services is not a club for IIT graduates. The canteen worker, the hairstylist, the gig driver, and the schoolteacher all sell services, and that is where most working Indians earn their bread. Manufacturing struggles to match the pay. A factory offering Rs 20,000 loses workers to gig platforms paying Rs 30,000 to 40,000. And the high-end jobs in manufacturing that pay more come from the same narrow pool. Then Remittances: NRIs sent home around $155 billion last year, up from roughly $70 billion before COVID. China, with its own large diaspora, receives about $20 billion. This is money spent in India, on parents, medical facilities, and buying houses. India keeps a remittance surplus of around $143 billion. Put the three together. A goods deficit of about $330 billion, a services surplus of $210 billion, a remittance surplus of $143 billion. The sum is a surplus. Which is why the anxiety about gold and oil is misplaced. Gold is a $70 billion line in an $800 billion import bill, and it climbed only because the price did. Net of exports, oil costs about $120 billion against a $3.8 trillion economy. A supply cut-off would hurt, while a higher oil price, on its own, does not sink the country. A cheaper rupee has done the opposite of harm, pushing exports into double-digit growth over the past three months.

The goods deficit is one column, not the whole account. Add the $210bn services surplus and $143bn in remittances, and India runs a small current account surplus.

The Money That Walked Out The real trouble sits in the capital account. Last year India attracted about $98 billion in long-term investment and watched about $91 billion leave. Earlier investors cashed out through IPOs like Hyundai's and exits from startups. Portfolio investors pulled out roughly $16 billion. That $16 billion alone was enough to send the rupee sliding and force the RBI's hand. Much of the money is chasing the AI boom in Korea and elsewhere. So why are portfolio investors leaving? This is the thing that is worth fixing. The Rs 7 Lakh Crore Nobody Voted For The Reserve Bank has just held the repo rate at 5.25 per cent for the third meeting running in FY27. As discussed in the previous podcast in May, the central government has stayed disciplined while the state governments have not. Every party in power, whatever its colour, has turned to freebies, the latest being Delhi's roughly Rs 2,500 monthly transfer to women under Delhi Lakshmi Yojana. The borrowing by various states should have pushed interest rates up. Instead, the RBI supplied around Rs 7 lakh crore last year through open market operations, buying government bonds. A normal year sees Rs 30,000 to 40,000 crore, but last year this was closer to seven lakh crore rupees. Keeping rates low while releasing that much money does two things. It pushes the rupee down, and it seeds inflation that arrives late. Milton Friedman, an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences, had warned that monetary policy works with long and variable lags. The good effects show first, more credit and more growth. The bad effect, inflation, comes a year or two later. Around Rs 1 lakh crore sits idle with the RBI each day, so the system is already awash, and growth may come in higher than the RBI expects before the inflation does. With the inflation around 4.3 per cent and the RBI's own projection near 5 per cent, real rates are close to zero. Prof Tantri's fear is an inflation rate that settles at 5 to 6 per cent rather than the 4 per cent India is comfortable with. When it lands, the RBI will point at monsoon, food and fuel, and say nothing about the Rs 7 lakh crore. The monsoon and fuel excuse is weaker than it looks. For example, as Swarajya reported, India's crops respond far less to a bad monsoon than they did in 2015. A 15 to 16 per cent rainfall deficit no longer collapses sowing. In the old days a failed monsoon could predict infant mortality. This link has loosened, so blaming the monsoon explains less than it once did. The previous RBI Governor at least ran a clear thesis. His thesis was to hold rates high so temporary food-price spikes do not harden into permanent high wage demands. You could reject that thesis, as I did, says Prof Tantri, and it was still a thesis. But currently, the RBI offers no equivalent logic. RBI, while everything in its own report reads as healthy, is taking measures that are the ones taken at the time of emergency.

Today, after inflation, savers will earn almost nothing,on the RBI's own forecast.

Inside GIFT City, $100,000 becomes a $2 million bet with the currency risk removed. The RBI guarantees the exchange rate, and the NRI pockets the gap.

The Guarantee That Prints Free Money And Its Risks Rather than raise rates, the RBI has reached for something else. It has told NRIs to bring in dollars and promised them the exchange rate. Normally a higher Indian interest rate is cancelled out by an expected fall in the rupee, so the extra yield is an illusion. The textbook calls this uncovered interest parity. Guarantee the exchange rate and the illusion turns into free money. So an NRI can borrow to play this. Through GIFT City, treated as foreign soil, someone with $100,000 in an account can borrow up to $2 million, 20 times over, from an Indian bank. Park that $2 million in an FCNR-B rupee deposit, earn about 1.5 per cent more than at home, and collect at a guaranteed rate of 95 or 96 whenever the term ends. Around $40 billion has already arrived. The RBI expects $100 billion by 30 September. The trouble is that these are two- and three-year deposits. Just imagine if in 2028 or 2029 the same NRIs come to collect $80 to $100 billion. A $16 billion outflow shook the rupee last year. A $100 billion exit during a war or a crisis, with the guarantee to be honoured out of forex reserves, is a different order of event. India did this kind of thing in 2013, when the current account deficit was 5 per cent, inflation was high and a third of the reserves were already gone. None of that is true today. There is a current account surplus and $650 billion in reserves. This FCNR-B route is intensive-care medicine for a patient who is not in intensive care, and in fact your own report shows it as healthy. The tax response has aimed at the wrong target too. The government exempted long term capital gains on government bond investment. India does not need foreign money for its bonds. The fact that the government has not borrowed abroad is a source of stability, the thing that separates it from a country like Bangladesh. That exemption should have gone to FDI, the risk capital that builds factories and stays. Meanwhile, domestic saving is being discouraged. Negative real rates punish savers, and the newer, exemption-free tax regime has stripped out the old reasons to save. Investment runs on savings, domestic or foreign, and policy is squeezing both at once. The Good News, And The Known Fixes There have been important reforms in recent times. GST has been reformed, free trade agreements are being signed across the board, including with the US, and for the first time India is seeing science-based entrepreneurship, with firms building payloads and deep technology rather than another delivery app. the R&D spending, by NITI Aayog's account, is at an all-time high. If productivity and innovation take the center stage, the monetary policy becomes a second-order worry, then the above mentioned risks don't matter much. The fixes are known: let the rupee slide gently, 2 to 3 per cent a year in line with the excess inflation, which lifts exports and delivers atmanirbharta, fight volatility with reserves and a small rate rise, not a free money guarantee to strangers. Put the highest-multiplier money into defence and defence research.

Reserves and external debt were level at $700bn six months ago. The rupee's calm now rests on the rising debt.