RBI Mulls Dollar Deposit Scheme and Tax Cut to Stem Rupee Slide

Why It Matters

At a time when the rupee is under pressure from rising oil prices and geopolitical uncertainty, attracting dollar inflows is critical for maintaining India's import‑cover capacity and preventing a balance‑of‑payments squeeze. A successful deposit scheme could not only replenish reserves but also signal confidence in India's monetary framework, potentially stabilising the currency and lowering borrowing costs. Eliminating the withholding tax would make Indian sovereign debt more attractive to global investors, supporting the government's financing needs and reinforcing the country's reputation as a stable emerging‑market destination. Both steps could help curb the outflow of capital that has already exceeded $20 billion this year, preserving market confidence and limiting further rupee depreciation.

Key Takeaways

• RBI is studying a revival of the 2013 dollar‑deposit scheme that previously raised about $26 billion.
• A 5% withholding tax on foreign investors in Indian government bonds may be removed to spur inflows.
• India's foreign‑exchange reserves have fallen to $698 billion from a $728.5 billion peak.
• The rupee slid 5.5% this year, reaching a record low of 95.33 per dollar.
• Equity outflows hit $20.6 billion in the first four months of 2026, with $19 billion withdrawn in March‑April.

Pulse Analysis

The RBI’s contemplation of these two levers reflects a broader shift from reactive market interventions to structural tools that can generate sustainable dollar inflows. The 2013 deposit scheme succeeded in a low‑rate environment; replicating it now would require a compelling value proposition for investors facing higher U.S. yields. By potentially offering concessional swap rates or other incentives, the RBI could tap the sizable NRI pool, which holds an estimated $1.5 trillion in overseas assets. However, the success of such a program will hinge on the central bank’s ability to assure participants of currency stability and transparent exit mechanisms.

The tax‑cut proposal targets a different segment—institutional bond investors—who are more sensitive to yield differentials and tax drag. Removing the 5% withholding tax could narrow the spread between Indian sovereign yields and comparable emerging‑market bonds, making India a more attractive destination for portfolio inflows. This could also help the government diversify its financing sources, reducing reliance on domestic banks and mitigating the impact of capital‑flight episodes.

Both measures carry fiscal and monetary trade‑offs. A deposit scheme could increase the RBI’s dollar liabilities, potentially complicating future monetary policy if large volumes need to be unwound. The tax exemption would reduce fiscal revenue, albeit modestly, and may set a precedent for further tax concessions. Nonetheless, in a scenario where the rupee is pressured by external shocks, the incremental dollar inflows could outweigh these costs by preserving import cover and limiting inflationary pressures.

Looking ahead, the RBI’s decision will likely be shaped by the pace of oil price movements, the trajectory of the Iran‑Israel‑U.S. conflict, and the response of global investors to emerging‑market risk premiums. If the central bank moves swiftly, it could pre‑empt further rupee depreciation and restore confidence. A delayed or half‑hearted approach, however, may leave the currency vulnerable to a self‑reinforcing cycle of outflows and weakening, eroding the gains made in recent years of reserve accumulation.