However, broader markets are still wrestling with (a) the co-relation of these flows with first FCA position and (b) why the exchange rate has continued to weaken even after such strong capital inflows. Public Sector Banks, front led by larger Banks, are apparently anchoring the drive, ensuring incremental flows by leveraging not only the deposits, but also the trust built with materially significant clientele (credit worthiness and risk profile duly factored) spread across various geographies and remaining tacitly agile by shifting their strategy to an optimally blended Onshore-Offshore gameplan. We believe that significant majority of existing FCNR deposits which are going to mature in Aug/Sep’26 will be renewed under the new scheme (gravitated by higher interest rates) and will boost the FCNR (B) inflows, wherein total amount mobilized so far in 45 days would have easily crossed the total amount mobilized in 2013 in 3 months! Overall, we believe, FCNR (B) deposits in the range of $65-70 billion should be received overall in scheme, and including OFCB and ECB at $80-$85 bn. Firstly, the puzzle of FCNR(B) accretion and such being not reflected concomitant growth in FCA of RBI. It is important to explain this link as otherwise there could be conjectures and speculation dotting the landscape. 

In principle, while RBI provides weekly change in FCA every Friday, every bank has a designated time during the week to swap these FCNR(B) deposits with RBI and get equivalent rupee resources. Thus it is entirely possible that FCNR(B) deposit numbers are being captured by RBI and becomes a part of FCA with a clear lag, with the assumption that a large part of foreign exchange reserves is being recouped and adding to RBI foreign exchange coffers. Also, as long as such accounting is not reflected in RBI FCA, it will also not show rise of equivalent rupee resources. Let us explain this in terms of numbers. So far (till 17 Jul), FCA has increased by $7.6 billion (since 8 June), while till July 17th as per RBI deposit mobilization, the numbers were $17.4 bn for FCNR(B) flows, possibly reflecting that exchange process at RBI by the banks were happening gradually (say 44%, for the entire amount/ Rs 87,995 increase in time deposits). The next reporting for FCA for July is for the week ended July 24 & week ended July 31 and we expect for the next 15 days period (17 Jul-31 Jul) FCA inflows could touch $10-12 billion based on current trends. This should make most of the overall FCA accruals/growth (till July end) of $17-20 billion post the RBI measures accounted for in RBI reserve data buoyed primarily by FCNR (B) inflows. 

Secondly, RBI intervention in the foreign exchange market has been somehow sporadic and not full throttled ever since the disturbances in West Asia has broken out. Employing a Censored Tobit model to estimate how RBI’s daily foreign ex change intervention reaction function has influenced the direction of rupee value and impacted volatility, our results indicate that RBI on an average intervenes $14 million/day to thwart rupee intervention which is statistically significant . However, the volatility coefficient though positive, but is statistically insignificant suggesting that such quantum of RBI intervention strategy was unable to arrest the volatility and prevent Rupee from further depreciation. This amount given the stock of $676 billion is not significant enough to curb the rupee depreciation. In contrast, the findings of Ghosh (2001) using a similar model indicate that in 1997-98 during the time of former RBI Governor Bimal Jalan, RBI intervention on an average was much higher at $55 million and was also able to stop rupee from further depreciation, even as overall foreign exchange reserves was of the order of only $29 billion or so. The volatility coefficient was also statistically significant during that time indicating that the volatility also had declined then because of forceful intervention by RBI. 

Rupee has moved 360 degrees; from being a shock absorber to not being a shock absorber. It is therefore important to not let the Rupee travel 360 degrees again but ensure its implied resilience to checkmate exogenous shocks without losing competitiveness. This is important given frictions in trade and supply/value chains, geopolitical risks and skewed capital flows. Allowing the rupee to depreciate even now against such healthy capital inflows may result in an endless fall driven by self fulfilling prophecy after the window for FCNR(B) closes on 30’Sep 2026.