RBI should curb non-essential LRS outflows, scrutinise ODI: SBI Research | Economy & Policy News

The government and the Reserve Bank of India (RBI) should consider curbs on non-essential remittances under the Liberalised Remittance Scheme (LRS) and closer scrutiny of overseas direct investment (ODI) outflows to ease pressure on the rupee, State Bank of India (SBI) said in a report on Thursday.

Defending the rupee would, therefore, require addressing vulnerabilities in both the current and capital accounts, it said. The report also called for government measures on taxation and external commercial borrowings (ECBs) to deepen domestic borrowing avenues and support capital flows.

The report further said that the rupee could retain an appreciating bias following recent measures by the RBI to stabilise market conditions, although global uncertainties remained significant. Non-essential foreign exchange outflows warranted immediate attention, with the report pointing to a sharp rise in overseas travel expenditure compared with spending on studies abroad. General-purpose travel expenditure stood at $665.8 million in July, against $148.5 million for studies abroad. The ratio had exceeded five times in June.

Between March and July, expenditure on studies abroad stood at $2.47 billion, compared with $6.36 billion on travel. Outflows under the gifts category amounted to around $1.2 billion during the period, against $2.6 billion in the whole of 2025-26, the report said.

SBI called for curtailing non-essential LRS outflows in its FY27 outlook report released in April, arguing that a review of such remittances could help conserve foreign exchange.

The report also flagged a sharp rise in ODI outflows, with combined debt and equity outflows increasing to $27.2 billion in 2024-25 and $27.8 billion in 2025-26, from $13.4 billion and $13.7 billion, respectively, in the preceding two financial years.

Between 2008 and 2024, combined ODI debt and equity outflows remained within $15 billion annually, but the trend has shifted sharply since then, the report said.

Resident individuals’ ODI under the LRS amounted to $2.6 billion in 2025-26, within the annual limit of $250,000 per individual. SBI Research said India’s policy framework could draw lessons from China’s annual foreign exchange quota system, particularly to address potential risks involving the routing of investments through unlisted structures in other jurisdictions.

The report said the pressure on the rupee reflected a shift in India’s balance of payments, with capital account deficits becoming persistent since December 2024. Earlier episodes of sharp rupee depreciation had largely coincided with pressure on the current account deficit.

Separately, the report said the RBI could consider an asymmetric adjustment to the liquidity adjustment facility corridor, beginning with a 50-basis-point increase in the marginal standing facility rate, followed by a 25-basis-point repo rate increase in December. This would tighten overnight liquidity conditions while limiting the immediate increase in the benchmark policy rate, it said.