Don't wait for the Fed.

"In early June, RBI governor Sanjay Malhotra reportedly said that India had enough reserves to cover 11 months of imports." Even accounting for $110 billion in forward market commitments and $235 billion of short-term debt, reserves of $337 billion is enough to cover 5-6 months of imports, wrote Sudipto Mundle. In order "to attract stable long-term foreign capital" and increased participation in Government Securities (G-Secs) by foreign portfolio investors (FPI), the government has announced "tax exemptions on interest income, long term capital gains (LTCG) and short term capital gains (STCG), expansion of specified securities under the Fully Accessible Route (FAR), and streamlined investment norms." pib.gov.in. The Reserve Bank of India (RBI) was not to be left behind. In October 2025, the RBI loosened restriction on external commercial borrowings. "Companies may raise up to $1 billion or 300% of their net worth (whichever is higher), while financial sector firms regulated by RBI, Sebi, Irdai, or PFRDA face no cap." TOI. The idea is that companies will borrow at cheaper rates abroad to invest in India which will create jobs and increase economic growth, while the influx of foreign exchange will strengthen the rupee. The problem is that companies will have to repay in foreign currency and if profits and/or the rupee were to fall significantly they might find it difficult to service their loans. Last week, "India's central bank has allowed domestic lenders to extend loans to non-residents (NRI) against foreign currency deposits, including via their offshore branches." "Earlier this month, the RBI offered to subsidise hedging costs for foreign currency non-resident (FCNR) deposits as a way to encourage banks to bring in dollar flows from the Indian diaspora." Reuters. Public sector banks (PSB) are offering up to 6.5% on FCNR(B) deposits (ET), which is more than they offer to domestic investors on fixed deposits of similar duration  (paisabazaar.com). Given a consumer price index (CPI) inflation rate of 3.93% (pib.gov.in) the real returns for domestic investors drops to around 2% and the weakening of the rupee reduces the value of their investment. Indian banks are offering around 100 basis points above yields on US 5-year Treasuries, which is at 4.142% (investing.com), but investors are demanding higher yields (ET). It will be lucrative for NRIs "as the nominal FCNR interest rate of 6-7% is higher than international floating rates and NRIs can expect high returns from arbitrage. If they leverage their deposits, annual returns could rise to a whopping 12-19%, according to a Times of India report," wrote Mundle. Since our foreign exchange reserves are adequate why are the government and the RBI so anxious to augment our reserves? Maybe because they are unsure of what the US Federal Reserve is going to do. "The central bank held rates steady at 3.50% to 3.75% this month, as widely expected, but at his first press conference Fed Chair Kevin Warsh surprised many by stressing returning inflation to 2% target as the priority with hardly any mention of the jobs market. But most say the Federal Open Market Committee will prefer to keep rates where they are in coming months." Reuters. "The dollar surged in response and looks set for a period of relative strength." "The dollar rally is an opportunity for Asian capitals to reconsider their options. Indonesia and India, whose currencies have also been under siege could have used a less muscular tone from Warsh," wrote Daniel Moss. "India is trying to defend both the rupee and the stock market simultaneously," wrote Shankar Sharma. Domestic investors are keeping share prices higher through systematic investment plans (SIP) allowing foreign investors to exit at higher prices. The RBI is preventing a fall in the value of the rupee giving foreigners more foreign currency in exchange. "The RBI cannot burn forex reserves defending the rupee, giving foreign capital minimal-cost exits. Nor can Indian investors blow up their savings, giving foreign capital zero-cost exits. India cannot fight a two-front war." Unlike Warsh, the RBI seems unwilling to annoy the government by raising interest rates. Borrowing at high rates to support the rupee to keep cost of oil, gas, and cooking oil down. Must be paid back in future. With interest.