RBI sees rupee as undervalued; FCNR(B) inflows cross $32 billion
The Reserve Bank of India's Governor stated that the rupee, following recent depreciation, may now be undervalued rather than overvalued.
Inflation control was reiterated as the central bank's foremost policy priority guiding monetary policy decisions.
Inflows under the FCNR(B) (Foreign Currency Non-Resident Bank) deposit scheme have crossed $32 billion, alongside continued foreign investment in government securities.
These inflows were cited as having strengthened India's external sector position, supporting reserves and the balance of payments.
FCNR(B) Deposit Scheme
FCNR(B) — Foreign Currency Non-Resident (Bank) — is an RBI-regulated deposit scheme allowing Non-Resident Indians (NRIs) to hold term deposits in India denominated in specified foreign currencies (USD, GBP, EUR, JPY, AUD, CAD), eliminating exchange-rate risk for the depositor since both principal and interest are held and repaid in the foreign currency. Introduced to attract foreign currency inflows without directly exposing depositors to rupee volatility, it has historically been used as an emergency inflow tool during periods of external stress (notably the 2013 "taper tantrum," when a special swap window mobilised over $34 billion).
Key Details
- Regulated under RBI's Master Direction on Deposits and Foreign Exchange Management Act (FEMA), 1999 provisions for NRI accounts
- Both principal and interest are freely repatriable and exempt from Indian income tax
- In 2026, RBI relaxed interest rate ceilings on fresh FCNR(B) deposits (3-5 year tenors) and long-tenor NRE deposits to encourage renewed inflows amid external account pressures
- Deposits under the scheme are distinct from NRE (Non-Resident External, rupee-denominated) and NRO (Non-Resident Ordinary) accounts
The $32 billion inflow figure reflects the success of RBI's 2026 relaxation of FCNR(B) ceilings in mobilising NRI foreign currency deposits, which directly bolsters forex reserves and eases pressure on the rupee.
Real Effective Exchange Rate (REER) and Currency "Valuation"
Whether a currency is "overvalued" or "undervalued" is typically assessed using the Real Effective Exchange Rate (REER) — a trade-weighted index of a currency's exchange rate against a basket of trading-partner currencies, adjusted for relative inflation differentials. The RBI publishes a 40-currency REER index; a REER above 100 (base year-indexed) is generally read as signalling overvaluation relative to trade competitiveness, and below 100 as undervaluation.
Key Details
- RBI's REER index uses a base year that is periodically revised (currently referenced to 2015-16=100 in recent RBI bulletins)
- A depreciating nominal exchange rate, if not fully offset by relative inflation differentials, pushes REER down, indicating the currency has become more competitive/undervalued
- Currency valuation assessments affect export competitiveness, import costs, and capital flow behaviour
- RBI's monetary policy mandate under the amended RBI Act, 1934 (Section 45ZA, inserted in 2016) is flexible inflation targeting (4% CPI inflation, +/-2% band), decided by the Monetary Policy Committee (MPC)
The Governor's comment that the rupee "may be undervalued" is a REER-based assessment following recent depreciation, suggesting limited near-term case for RBI to intervene to prevent further rupee weakening on competitiveness grounds.
India's External Sector Buffers — Reserves, FPI in G-Secs, and BoP
India's external sector resilience is measured through forex reserves, the current account balance, and capital account inflows including Foreign Portfolio Investment (FPI) in government securities. FPI investment in Indian government bonds has grown following India's inclusion in global bond indices (JPMorgan GBI-EM Global Diversified Index from June 2024, and Bloomberg Emerging Market indices), which channels passive index-tracking foreign capital into rupee debt.
Key Details
- RBI's flexible inflation targeting mandate: 4% CPI with a +/-2% tolerance band, reviewed by the six-member Monetary Policy Committee (MPC) every two months
- Forex reserves are managed by RBI to cushion against external shocks and support import cover
- FPI limits in government securities operate partly through the Fully Accessible Route (FAR), introduced in 2020, which allows unrestricted non-resident investment in specified government bond series
- Sustained NRI deposit and FPI inflows reduce reliance on external commercial borrowings and support the rupee without direct RBI market intervention
The combination of FCNR(B) inflows and FPI investment in government securities cited by the Governor represents the two main non-reserve levers India has used in 2026 to shore up the external account amid global volatility, reducing the urgency for direct currency intervention.
- FCNR(B) inflows have crossed $32 billion in the current mobilisation drive
- RBI's flexible inflation target: 4% CPI, +/-2% band, under Section 45ZA of the RBI Act, 1934 (inserted 2016)
- RBI eased FCNR(B) and long-tenor NRE deposit rate ceilings in June 2026 to spur inflows
- India was added to JPMorgan's GBI-EM Global Diversified Index effective June 2024, boosting passive FPI inflows into government securities