If you’ve been following the Indian rupee lately, then you know it has been a rollercoaster ride. At highs previously, slipping through the 96 marks against the dollar and really testing the resilience of importers, frequent travelers, and policymakers too. However, beyond the headlines, an unusual story is developing.
The Reserve Bank of India (RBI) wants you to take another peek. In an unprecedented media briefing recently, RBI Governor Sanjay Malhotra has declared that – despite the rupee’s present strain, it isn’t “overvalued.” He went ahead saying that it might very well be “undervalued” relative to both nominal and real effective exchange rates. And this isn’t just a casual remark from any policymaker; it is also a message. It’s a message that carries a central piece of the equation that has been guiding India’s approach to stabilizing the external account and reaffirming confidence in its currency, especially recently.
But what could have pushed the rupee to shed all that weight? And how did India end up attracting $32 billion worth of foreign inflows in only a matter of weeks thanks to some almost 10 year old deposit account, that just experienced its best month. Let’s go into the story.
The $32 Billion Wave Nobody Saw Coming
Amid a package of initiatives rolled out by the RBI on 5th June 2026 to prop up dollar inflows, it was the ‘special window for Foreign Currency Non-Resident (Bank)’ (FCNR(B) deposits) that hogged the limelight. The central bank undertook to wholly bear the foreign exchange hedging cost in respect of fresh 3-to-5-year dollar deposit collections by the banks from Indian nationals resident outside India and OCI (overseas citizens of India). This facility remained in operation till 30 September 2026 and imposed a minimum one year maturity for the deposit.
The results were awesome.
By July’s end, banks had together mobilised over $32 billion under just this scheme alone. For context, the highly publicised 2013 FCNR(B) window (which was launched by the erstwhile RBI governorRaghuram Rajan in response to the infamous‘taper tantrum’.) –had garnered over $26 billion over a span of many months. The 2026 one achieved this in around 45 days,making it possibly one of the quickest dollar gathering initiatives of contemporary Indian finance. It did not end with that either. Some $7 billion dollars more have flown into government bonds since 5th June policy statement as New Delhi made overseas portfolio investors exempt from capital gains and interest incomes tax.
Why FCNR(B)? Why Now?
To grasp why this scheme worked so well, we first need to appreciate the problem it was fixing. Indian banks could not previously compete with US dollar rates because they’d have to bear the (high) cost of hedging foreign exchange exposure-typically 3%–3.5% per annum-which would cut into depositors’ returns. The RBI’s June 2026 circular flipped this equation on its head: by bearing the hedging cost themselves, they permitted Indian banks to give that entire premium back to NRI account-holders. Certain banks, for example, opened dollar accounts at 7%pa for such holders of money with foreign address and no intention of taking such funds back from India, when compared with 4.3% offered on 5-year US Treasuries. The no-brainer for any NRI. You give your dollars, earn a decent bit over and above those in the US, bear zero rupee exchange rate risk (and both principal and interest return in dollars), and pay no tax to the Indian government. Not to mention, the Reserve Bank of India waived the statutory requirements onCRR and SLR so banks could employ their funds 100% hence actively pushing such account opening. Result, a sea of dollars rushed to fill the vacuum created by the Indian banking system.
If Inflows Are So Strong, Why Is the Rupee Still Weak?
Which is where the bit where it doesn’t quite add up starts. All of these eye watering capital inflows in this otherwise ‘event risk’ of epic proportion do not appear to be having any impact on the rupee, which is struggling to stay ahead of its all-time lows, inching close to 96.15 against the greenback. Why shouldn’t $32bn of inflows be giving the rupee a substantial leg up?
Governor Malhotra spoke exactly to this apparent paradox when he met the finance ministry officials this week.
“Rupee depreciation is being caused by external forces…geopolitical uncertainty, an overly strong dollar, high volatility in global flows, and persistent elevated levels of crude oil prices (due to the recent Hormuz crisis). It needs to be stressed that India’s current account position remained in surplus in the period of April-May 2026… Service exports are strong and remained resilient; remittances strong; our merchandise exports remain buoyant; FDI is strengthening.’ In short, according to Malhotra, ‘our currencies are weak not because of fundamentals but because of the storm around us.’ We believe that when the storm settles, it may settle at higher than current levels.
Analysts at India’s largest bank – State Bank of India – agree with the confusing picture being painted and concede that ‘inward FCNR(B) flows have been substantial. But they have been accompanied by significant dollar outflows. Outflow to oil companies paying much inflated oil import bill and outflows from exporters of such sensitive sectors to pharma andMSMEs who appear to be declining to hedge their receivables in the absence of clarity and confidence. Even so, India’s foreign reserves have stayed around US$ 675 billion, just flat this last month (see chart too) indicating the inflow and outflow of foreign currency amounts have kept pace.
Recycling Fears and the RBI’s Reassurance
If you’re going to promise such significantly better rates, the natural skeptics would naturally ask, “Isn’t this old money just putting on new clothes?” Concerns were raised that current FCNR(B) deposits were being prematurely withdrawn and placed under the new scheme to take advantage of rates – called recirculation. If this is indeed the case, the $32 billion would be much less and very little added to India’s actual stock of foreign currency.
Governor Malhotra said there’s “no prima facie evidence of recirculation of existing deposits…
Of any significance or concern.” The RBI, he assured, is prepared to mop up any excess liquidity these deposits create and invests any spare foreign currency abroad, without risking the central bank. It sounds a nice thought, because if indeed the deposits are new, then this definitely helps India’s balance of payments, improves the cushion against external shocks and allows the RBI greater maneuverability against currency movements.
How Big Could This Get?
The $32-billion mark is remarkable in itself but what we have perhaps seen is the prologue of the drama, not the epic. State Bank of India estimates that the overall FCNR(B) mobilisation under the scheme could cumulatively reach $65 billion-$70 billion. If these inflows are combined with those from offshore foreign currency bonds (OFCBs) and external commercial borrowings (ECBs) taken up by public sector units, then total foreign capital raised in the period under discussion could range from $80 billion to $85 billion. This is huge. This sum is enough to significantly sway India’s external account equilibrium and restore the country’s lost self-confidence over these metrics by bringing down reliance on the volatile portfolio inflows, bolstering foreign exchange reserves, strengthening the rupee’s foundations. The snag is it’s a window that will close one day. The special FCNR(B) scheme is set to be available until September 30, 2026, by which time the swap facility will cease to be offered by the RBI and banks would again have to shoulder the hedging expenses on their own. Desperation on both ends-for banks and NRIs-is all too palpable.
The Bigger Picture: Confidence in a Storm
But the numbers tell only part of the story. More than the digits, this episode highlights a far harder-to-measure commodity: confidence. There’s a not-for-the-faint-hearted macro picture globally in mid-2026: about $45 billion flows have been withdrawn from India by FIIs just this year. Foreign portfolio flows in 2025 amounted to $18.9 billion, the steepest one-way exit flow since 1992. Indian rupees are down nearly 7% this year alone. Oil prices are back above the century mark. But here’s Indian the diaspora, one of the largest and wealthiest around, answering the RBI call with unbridled fervor. And it isn’t simply a matter of yields. It reflects belief in India’s lenders, faith in the RBI’s captaincy, and the conviction of long-term prosperity for the subcontinent.
“You (rupee) are undervalued” – that’s Governor Malhotra’s statement as he issues a clarion to global investors and diaspora alike, “India isn’t falling apart. “. It’s not a stock to be short. The underlying structure is robust, and a keen eye for value, with a little patience, can reveal immense opportunity beneath the jitters.
What Should You Watch Next?
And this is not exactly for the love of Indian culture . Given the rupee slide for years and the current weakness, if you are an NRI sitting on dollar savings, the FCNR(B) window is perhaps the best window in over a decade you could find to earn India-linked yields without currency risk. Since July 29th, around $20 billion has already poured in and with the September 30th deadline approaching and banks bidding aggressively on rates, we may even see that scale of inflows in the next few months.
If you are an emerging market specialist or indeed a business owner with significant India operations, two things should be of utmost concern to you.
The first is whether the rupee begins to stabilize and even appreciate with the depth of such inflows. The second is how soon will the RBI ease its intervention in the forex market as it feels comfortable about the FCNR(B) cushion taking heavy lifting off its hands? So, even if you are just an India observer, make a note – of the fact that at a time when pretty much all other emerging markets were scrambling for dollars, in the last two months, India has mobilized probably one of the best capital wins from its non-resident population ever in such a short period. That is not weak. That’s got a lot of reservoirs of trust, still has a policy toolkit that works, RBI central bank still has the know-how to use it in support. May be rupee is bruised but it is certainly not broken to borrow RBI’s words. And with $32 billion already secured and going up by the day, not sure what can break the economy more.
