India Needs Structural Reforms for Capital Outflow: Ex-RBI Guv

Former Reserve Bank of India Governor Duvvuri Subbarao has asserted that India’s diminishing appeal to foreign investors demands fundamental structural reforms. He argues that short-term capital attraction measures alone are insufficient to curb the rupee’s ongoing weakness, which reached a record low of nearly 97 per dollar in May.

Assessing Short-Term Capital Inflows

The former RBI chief, who served from 2008 to 2013, specifically critiqued a June initiative aimed at attracting foreign currency deposits from non-resident Indians (NRIs) via FCNR-B deposits. Subbarao labeled this measure “too costly” if its primary goal was merely to bolster confidence in the Indian rupee.

• The FCNR-B measure successfully attracted $36.72 billion by July 31.
• It is projected to exceed $50 billion by its closure on September 30.

Despite these substantial figures, Subbarao views these as “borrowed dollars” that will require repayment upon maturity. He emphasized that such inflows do not build genuine confidence, advocating instead for “confidence-building flows” derived from foreign direct investment (FDI) and portfolio investment.

Driving Factors Behind Capital Outflow

Subbarao suggested several potential measures to address the underlying issues, including reducing transaction and tax-compliance costs for foreign investors. He also proposed further liberalizing access to both equity and debt markets within India.

• Foreign investors withdrew a net $17.3 billion from Indian stocks and bonds in 2026.
• Indian equities maintain a 44% premium compared to the broader Asian index.
• High valuations divert investors, while Indians also move more capital abroad.
• Significant global investments in artificial intelligence and semiconductors contribute to this outflow.

Rupee Support: 2013 vs. Present

The Reserve Bank of India’s current strategy to support the rupee has shown a less impactful outcome when compared to a similar approach taken in 2013. The rupee has experienced a decline of 0.5% in the first 46 days since these measures were announced.

• Rupee declined by 0.5% in the first 46 days of current measures.
• Rupee gained 7% during the same period in 2013.

Subbarao clarified that in 2013, the cost-benefit analysis for attracting FCNR deposits was more favorable due to abundant global liquidity, making it a cheaper option. This advantageous condition is not present in the current economic environment.

Ultimately, Subbarao concluded that robust domestic demand remains essential for reviving investment and effectively attracting foreign direct investment. He stated, “If there is demand, investment will come,” underscoring the foundational role of internal economic strength.