Explained: Why the Indian rupee is unlikely to appreciate sharply despite $49 billion foreign inflows through FCNR(B) deposits

The Reserve Bank of India (RBI), at the latest monetary policy of August 5, announced that there was no move to prematurely end the FCNR(B) deposit scheme, even though it has nearly doubled ($26 billion) what it garnered in 2013, through a similar scheme. 

In June, when the Indian rupee fluctuated between 95-96 to the dollar, hurt by the import of crude oil prices -- when the ceasefire between the United States and Iran was fragile -- and could break at any time. The regulator and the government was keen to improve the balance of payments, considering the pressure due to the import bill, and boost foreign exchange inflows and assist the rupee. 

But since the foreign exchange inflows, estimated to be near $50 billion -- the rupee has appreciated against the dollar to 95.2 on August 6, from 96.8 on July 23, a gain of 1.7 to the dollar. But these dollar flows do not enter the open market, so the market dynamics do not change. 

Economists are of the view that the trendline bias of the Indian rupee is towards depreciation

FCNR deposits – armoury to fight currency depreciation

FCNR(B) gives the RBI the armoury to fight another round of currency depreciation. Even since the ceasefire in the West Asia war saw the crude oil hit a low of $68.9 on July 6 and a high of $100.69 on July 23.

The pressure on the rupee is because India has a current account deficit and a capital account outflows. India’s current account deficit is likely at 1.8% of GDP in FY27, compared to 1.3% of GDP for FY26. There is a perfect co-relation between the currency and crude oil market.

The moment crude oil goes up, the demand for dollars will be higher and the currency will depreciate. The crude oil FOB Price (Indian Basket) is at $85. 71 per bbl in August, compared to $82.04 in July. Unless crude oil stabilises, the rupee will see no substantial appreciation.

In terms of foreign fund outflows, FII/FPI trading activity in equities shows in 2026 so far they have been net sellers of Rs 2.79 lakh crore. 

For example, even a$100 coming into the bank through FCNRdepositss, it is given to the RBI. The exposure for the bank continues to be in dollars. To be converted into dollars, the RBI will swap into rupees and give the bank the rupees, which they would not bring into the spot market.  

What is unclear at this stage is what is the extent to which existing FCNRs are being prematurely withdrawn to put into new scheme under leverage to gain a higher return. 

There has been some more disappointing news as on July 31, the Bloomberg Index Services delayed the inclusion of Indian government bonds into the Bloomberg Global Aggregate Index. If the inclusion had been made, global funds would have to convert foreign currencies into Indian rupees, to buy G-Securities. Gradual dollar inflows make the rupee more vulnerable to global macro-economic conditions.

Bur the RBI can use the method of ‘moral suasion’, which is part of the monetary policy to achieve a particular goal, which in this case could be to support the rupee.

The RBI can take the dollars from public sector banks through the swap facility to boost India’s forex reserves, which in the future can assist in defending the rupee. A slower appreciation of the rupee is what the central bank prefers.

With macro global conditions still evolving, both in terms of crude oil and foreign capital flows, it will be some time before which the rupee starts to strengthen against the dollar. More clarity will emerge after the FCNR(B) schemes close in September-end, by which time banks are estimated to garner near $80-90 billion.