RBI Sees Rupee as Undervalued; FCNR(B) Inflows Cross $32 Billion

Reserve Bank of India Governor Sanjay Malhotra has said the rupee has likely become undervalued following its sharp depreciation this year, even as the central bank's foreign-currency inflow measures — introduced in June to shore up India's balance of payments — continue building momentum, with FCNR(B) deposits emerging as the largest single contributor.

What Malhotra Said

In an interview with Mint, Malhotra made an unusually candid statement for a central bank governor: "With the recent depreciation, it would be reasonable to think that the rupee is not overvalued. If anything, one could argue that rupee has become undervalued, both in nominal as well as in Reer (real effective exchange rate) terms." Malhotra's remarks stand out because RBI governors typically avoid commenting directly on currency valuation or signaling preferred levels — a departure from the central bank's usual communication style.

The Numbers Behind the Undervaluation Claim

The rupee's Real Effective Exchange Rate (REER) — a trade-weighted, inflation-adjusted measure of the currency's competitiveness — stood at 90.96 in April, the lowest reading since at least 2014. A REER reading below 100 signals undervaluation, while a reading above 100 signals overvaluation. The rupee fell roughly 9.88% in FY26, its steepest annual decline in 14 years, and depreciated a further 6% in the current calendar year, hitting a record low of ₹96.90-96.96 against the dollar.

The RBI's Response: A Capital Inflow Push

Facing that pressure, the RBI introduced a series of foreign exchange measures in June, including concessional hedging facilities and swap arrangements designed to encourage overseas fundraising by state-run firms, banks, and through foreign currency non-resident deposits. In its first update on the scheme's progress, the RBI said the measures had mobilised $20.72 billion through mid-July, with FCNR(B) deposits accounting for roughly $17.5 billion of that total — a pace analysts at Nomura said "belies the prevailing narrative that banks were struggling to raise deposits" despite higher U.S. rates. A subsequent update showed the total climbing to $20.7 billion overall, with FCNR(B) inflows specifically at $17.41 billion, alongside $1.34 billion via External Commercial Borrowing swaps and $1.97 billion through Overseas Foreign Currency Borrowings.

Why the Scheme Matters Now

The measures echo a similar 2013 crisis-era playbook, when the RBI raised nearly $34 billion through FCNR(B) deposits and related swap windows to stabilize a sharply falling rupee. This time, the backdrop is different but comparably serious: the ongoing U.S.-Iran conflict has sharply lifted oil prices, raising the risk of a third consecutive year of a balance-of-payments deficit for India given the country's heavy reliance on imported crude. Bank of Baroda chief economist Madan Sabnavis noted that, consistent with the 2013 precedent, "most of the funds came in the last month" of that earlier scheme, suggesting the current round of inflows could still meaningfully accelerate before the RBI's swap window closes at the end of September.

A Notable Challenge This Time: Narrower Spreads

One key difference from 2013 is that the interest-rate advantage on offer has shrunk considerably. The spread between Indian banks' one-year FCNR(B) deposit rates and 12-month U.S. Treasury bill yields has narrowed from 2.9 percentage points in 2013 to just 1.4 percentage points now, according to a BofA Securities note — a smaller incentive gap that could make it harder to match the scale of the earlier campaign. Even so, BofA expects overall fund mobilisation of $60 billion to $70 billion as inflows gain momentum, while IDFC First Bank's chief economist Gaura Sen Gupta estimated the RBI's balance-of-payments position is currently tracking a surplus of roughly $25 billion, with upside risk if FCNR inflows strengthen further.

The Reserves Cushion

Malhotra has repeatedly emphasized the RBI's substantial reserves as a backstop against disorderly currency moves, noting the central bank holds close to $700 billion in foreign exchange reserves — compared to under $300 billion during the 2013 episode — giving it considerably more firepower to manage volatility if speculative pressure builds. He has also downplayed near-term balance-of-payments concerns, describing the situation as "not an undue concern yet" even as India's current account deficit has widened amid the oil-price shock.

What's Next

With the RBI's swap window remaining open until the end of September, banks have more than two months left to continue raising FCNR(B) deposits and other qualifying inflows. Investors and economists will be watching closely for the next official update on total mobilisation, along with any further commentary from Malhotra on the rupee's valuation, as India continues navigating the twin pressures of an oil-driven current account strain and a currency the central bank itself now describes as undervalued.