There's a way for ₹ to add muscle without rate hike

Published 8 July 2026 · india

Live Events as a Reliable and Trusted News Source Addas a Reliable and Trusted News Source Add Now! (You can now subscribe to our (You

Live Events as a Reliable and Trusted News Source Addas a Reliable and Trusted News Source Add Now! (You can now subscribe to our (You can now subscribe to our ETMarkets WhatsApp channel Since January 2025, the Rupee has depreciated by ~9%. INR was amongst the weakest currencies in Asia during May 2026 when it weakened to 96.96. The currency has faced headwinds over the last ~2 years: expensive equity valuations, India not being in the AI theme, tariff challenges, uncertainty due to the impact of agentic AI on India's $160 billion software exports, high energy prices due to geopolitical tensions, and tepid net FDI over the past two years.Above all, the narrow interest rate differentials vis-a-vis the US and expectations of INR depreciation have led to greater importer hedging (importer leads) and subdued exporter hedging (exporter lags). Indian equity markets witnessed FPI outflows of ~$30 billion, in addition to ~$19 billion from last year.RBI's headline reserves are ~$685 billion. RBI, due to its FX intervention, has a short forward book of ~$100 billion. Adjusting for this and gold valuation, usable reserves are ~$460 billion.In the above backdrop, GOI and RBI came up with measures to augment capital flows - removal of withholding tax and capital gains on government bonds, bearing full hedging cost for incremental FCNR (B) deposits, concessional swap window for ECBs raised by PSUs, expansion of bonds to be included in the Fully Accessible Route (FAR) for FPIs, simplifying various investment categories for FPI investment, permitting Persons Resident Outside India (PROI) to invest in Indian equities.

These measures will likely bring in capital flows in the region of ~$70 billion.A similar FCNR (B) scheme was announced in 2013. In September 2013, prior to the FCNR announcement, the INR was 65.70, and the 40-country Real Effective Exchange Rate indicated an 11.50% undervaluation. Following the FCNR announcement in September 2013 until June 2014, the INR appreciated by approximately 10%, moving from 65.70 to 59.10. Consequently, the REER undervaluation corrected to 4.5%. While FCNR was a necessary catalyst for this appreciation, the sufficient condition was an expectation of a stable government in 2014 that triggered capital inflows.Fast forward to 2026, and the USD/INR was at 95.70 when the recent FCNR announcement was made, with the 40-country REER being ~10% undervalued. The FCNR announcement provides the necessary condition for INR appreciation; the sufficient condition could materialise from an unwind of importer leads and exporter lags, estimated at ~$185 billion.For FY24-25 and FY25-26, Balance of Payments (BoP) data suggests a net reserve drawdown of ~$29 billion. This number does not fully capture the extent of the RBI's FX intervention. RBI sold $87 billion in the spot market over these two years, $34 billion in 2025 and $53 billion in 2026. Further, RBI increased its net short USD position in the forward market to $103 billion from a long position of $24 billion in FY23, swinging by $127 billion.Combining the above spot sales and the change in the forward book, which is ~$214 billion, and comparing this to the reserve drawdown from the BoP data of ~$29 billion indicates an unexplained difference of $185 billion.