India: Capital Flow Measures: More a Liquidity Story Than an FX Story

Research evidence excerpt

India: Capital Flow Measures: More a Liquidity Story Than an FX Story

Economics Research

16 July 2026 | 3:19AM IST

ASIA IN FOCUS

n The RBI recently announced measures to support capital inflows including Santanu Sengupta

+91(22)6616-9042 |

hedging support for non-resident FCNR(B) deposits, and external commercial santanu.sengupta@gs.com

Goldman Sachs India SPL

borrowing (ECBs), tax exemptions for FII investment in G-Sec, and a broader

Arjun Varma

investable G-Sec universe for FIIs. While all of these measures are aimed at +91(22)6616-9043 |

arjun.varma@gs.com

attracting foreign currency inflows, their impact differs across FX, domestic Goldman Sachs India SPL

liquidity, and onshore rates. Andrew Tilton +852-2978-1802 |

andrew.tilton@gs.com

n FCNR(B) deposits and ECB inflows primarily impact INR liquidity rather than Goldman Sachs (Asia) L.L.C.

spot FX, as the associated dollar inflows are swapped with the RBI and absorbed

onto its balance sheet. In contrast, FPI debt inflows can affect the level of

USD/INR more directly if they are not absorbed by the RBI.

n The scale of inflows depend on: a) onshore-offshore funding rate differential

where a low differential — either due to easier domestic liquidity or higher

offshore funding costs — would lower inflows, b) Indian banks’ offshore funding

cost to offer attractive leveraged returns to NRI depositors, and c) foreign banks’

balance-sheet capacity and exposure limits to Indian banks.

n We estimate banking system liquidity at around 1% of NDTL by end-CY26,

assuming ~$60bn overall inflows by then, with the RBI sterilizing around half of

the incremental inflows. If inflows rise to $100bn, surplus liquidity could

approach 3.5% of NDTL, likely requiring additional sterilization via longer-tenor

VRRRs or a temporary CRR hike.