Revised Inflow Projections and a Rupee Puzzle
State Bank of India’s Economic Research Department has sharply revised its forecast for deposits under the RBI’s special FCNR(B) facility, which fully offsets banks’ hedging costs. The original estimate of $40–45 billion in early June has been lifted to $65–70 billion, and combined with other overseas borrowing channels, total inflows could reach $80–85 billion—well above the earlier $55–65 billion forecast.
Despite this deluge of dollar inflows, the Indian rupee has continued to weaken, prompting the research team to flag a striking shift. “The rupee has moved 360 degrees, from being a shock absorber to not being a shock absorber,” said Soumya Kanti Ghosh, Group Chief Economic Advisor. The comment underscores that the currency is no longer automatically adjusting to cushion external shocks, a role it played historically.
The research also highlights a data puzzle: the RBI reported $20 billion in total FCNR(B) inflows by 17 July, with $17.4 billion already parked under the scheme, yet the foreign currency assets on the central bank’s balance sheet haven’t shown a corresponding jump. This discrepancy adds to market anxieties about the sustainability of the rupee’s level once the facility closes on 30 September 2026.
Why $70 Billion Isn’t Strengthening the Rupee—and What It Means
Why the Rupee Is Weakening Despite Record Inflows
The correlation gap between FCNR(B) accretion and foreign currency assets suggests that the inflows are not being fully reflected in gross reserves, possibly because the RBI is using swaps or forward sales that do not immediately swell the reported FCA. This has created speculation that the central bank is deploying a different off-balance-sheet strategy, leaving the spot market with less support than the headline inflow numbers would imply.
SBI’s analysis, using a Censored Tobit model, found that RBI’s daily intervention averages just $14 million—a fraction of the $55 million per day observed during the 1997–98 Asian crisis, when reserves were a mere $29 billion. The current intervention quantum is statistically significant in preventing volatility, but the volatility coefficient itself is insignificant, meaning the strategy fails to arrest the rupee’s slide. This contrasts with the earlier period when forceful intervention actually dampened volatility.
The Shock Absorber Reversal and Its Consequences
The ERD’s warning about the rupee’s 360-degree turn points to a structural change in policy. Historically, the RBI allowed the rupee to depreciate to absorb external shocks; now, even abundant capital flows are not preventing depreciation. The fear, articulated by Ghosh, is that if the rupee continues to weaken despite healthy inflows, a self-fulfilling prophecy of endless decline could grip the market once the FCNR(B) window shuts. The bank’s call for “implied resilience” signals that the central bank may need to demonstrate a more muscular intervention stance to avoid a disorderly fall after September.
What Treasury and Investment Teams Should Do Now
- Corporate forex managers: The forecast post-September depreciation suggests securing forward cover beyond 30 Sep 2026 now. SBI’s warning of a “self-fulfilling prophecy” after the scheme ends implies that hedging costs could spike if the market panic intensifies.
- Import-dependent businesses: With the RBI’s $14 million/day intervention insufficient to curb rupee weakness, expect a further slide. Lock in dollar rates for upcoming payables before the facility’s closure to avoid a sharper rupee fall.
- Investors and analysts: Track the RBI’s weekly foreign currency assets data for any sudden jump that could signal a unwind of off-balance-sheet positions. A mismatch between reported FCNR inflows and FCA growth remains a key variable that could trigger a sharp reversal in the rupee’s trajectory.
- Banks participating in the FCNR drive: As large public sector banks anchor the mobilisation, the interest rate advantage on renewing maturing deposits creates a near-term fee-income opportunity—but be mindful of concentration risk if the rupee corrects sharply after the window.
Risk & Opportunity Assessment
| Commercial Risk | High | Rupee depreciation despite record capital inflows raises the risk of a disorderly fall after the FCNR(B) scheme closes, which would raise import costs and squeeze margins for domestic firms with dollar-denominated liabilities. |
| Competitive Risk | Medium | Exporters might gain from a weaker rupee, but sustained volatility and uncertainty make hedging expensive, potentially blunting any competitive edge from a depreciated currency. Conversely, a sharp reversal could hurt them. |
| Regulatory Risk | High | The RBI’s sporadic intervention and focus on the special hedging facility may indicate a reluctance to deploy reserves fully, raising the likelihood of a policy shift that could abruptly change exchange rate management after September 2026. |
| Reputation Risk | Medium | If the RBI fails to prevent a sharp rupee decline after the scheme ends, market credibility regarding its intervention capability could be dented, especially given the contrast with the 1997–98 episode when a much smaller reserve pool effectively curbed volatility. |
| Technology Disruption | Low | No technology angle present; the story is about foreign exchange and monetary policy. |
| Commercial Opportunity | High | Banks mobilising FCNR(B) deposits stand to benefit from fee income and interest rate margins on renewed deposits, with SBI noting that maturing FCNR deposits will roll over under the new scheme, creating a near-term revenue tailwind. |
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