RBI Signals Shift Toward Active Dollar Accumulation to Strengthen FX Buffers

Reports indicate the Reserve Bank of India is contemplating a more deliberate programme of acquiring US dollars to enlarge its stock of foreign exchange assets. The intent is to widen the central bank’s shock‑absorption capacity against sudden capital‑flow reversals and trade‑related pressures that can destabilize the currency and financial markets. Executing sustained currency purchases would inject rupee liquidity into the banking system unless offset by sterilization operations, leaving the RBI with a policy trade‑off that has direct implications for interest rates and inflation. If the central bank chooses not to neutralize the added liquidity, money‑market rates could come under downward pressure and domestic inflationary impulses could rise; if it sterilizes via bond sales or reverse repos, the operation will tighten conditions and could push government borrowing costs higher. Those sterilization choices will be shaped not only by external variables such as global dollar strength and US rate expectations, but also by domestic fiscal and market dynamics. The government has outlined an unusually large gross borrowing programme next year, and reports point to the RBI preparing another sizeable transfer to the Treasury after a strong accounting year — a combination that alters near‑term supply dynamics in the sovereign market. A large transfer could temporarily ease primary‑market pressure by reducing required gross issuance, but repeated or large transfers raise concerns about the adequacy of public contingency buffers and the separation of fiscal and monetary roles. At the same time, authorities have paused plans for a bond‑lending platform amid tax and regulatory questions, limiting dealers’ ability to reallocate securities and reducing market flexibility during heavy auctions. Those structural constraints — capped dealer inventories and banks’ limited capacity to absorb incremental paper — mean sterilization via outright bond sales may be costlier and more volatile than in past episodes. Markets will therefore watch not only the scale and instruments used for dollar purchases (spot, forwards, swaps), but also fiscal moves, open‑market operations, and any changes to auction calendars or market‑making facilities. For foreign investors, a visible rebuild of reserves can be reassuring and reduce tail‑risk premia on Indian assets, but the net impact depends on execution: if reserve accumulation is achieved by loosening domestic liquidity, it could lift asset prices short term; if achieved by aggressive sterilization in a stressed sovereign market, it could push up yields and increase market volatility. Policy credibility will depend on clear communication about objectives, the intended sterilization mix, and how RBI and government balance reserve rebuilding with fiscal financing needs. Over the medium term, larger buffers would give the RBI more room to respond to external shocks without immediate recourse to abrupt rate moves. The practical trade‑offs are tangible: building reserves is prudent insurance but can be politically and economically costly when it forces either looser domestic money conditions or higher borrowing costs. Observers should therefore treat any move to buy dollars as both an external‑stability measure and a test of the RBI’s operational bandwidth to sterilize without destabilizing sovereign financing or inflation expectations. Close tracking of open‑market operations, treasury issuance schedules, potential transfers from the RBI to the government, and progress on market infrastructure (including any revival of a bond‑lending platform) will offer the clearest signals about how authorities intend to reconcile these tensions.