Industry Odisha Bureau, Jul 27: Foreign investors are placing a vote of confidence in India that contradicts the skepticism rattling currency markets.
Over recent months, more than $32 billion has flowed into India through Foreign Currency Non-Resident deposits alone, with another $7 billion pouring into government securities. The surge follows deliberate policy measures designed to attract offshore capital, and it reveals something central banks often struggle to articulate: that weakness in a currency can coexist with strength in economic fundamentals.
The Reserve Bank of India, having orchestrated this capital inflow through targeted incentives, now faces an unusual problem defending a currency that appears depreciated despite mounting external resilience. RBI Governor Sanjay Malhotra has taken an unambiguous position: the rupee is undervalued, not overvalued, when measured against both nominal benchmarks and real effective exchange rates that account for inflation differentials with trading partners.
This assessment cuts against the intuition of many market observers who watched the rupee weaken amid broader emerging market turbulence, global capital flight, and dollar strength. Yet the inflows tell a different story. Foreign money continues entering India even as geopolitical tensions roil emerging markets and capital flows gyrate unpredictably. The scale is significant: nearly $32 billion through FCNR(B) channels represents decisive international appetite for rupee-denominated assets.
What makes this worth examining is not merely the quantity of inflows but what they signal about external sector momentum. India’s current account ran a surplus during the April-May period, an increasingly rare occurrence for emerging economies burning through foreign exchange to finance growth. Services exports remain robust. Remittances are resilient. Merchandise shipments are rising. Foreign direct investment is improving. These are not the hallmarks of an economy in external distress.
The RBI’s intervention strategy, by extension, is neither emergency nor desperation. Malhotra has been precise about this: the central bank does not target any specific exchange-rate level or band. Its interventions arrive only when volatility becomes excessive a distinction that separates pragmatic risk management from rigid defense of an arbitrary valuation. This flexibility is critical. Emerging markets that fight to defend currencies at levels their economies cannot sustain risk depleting forex reserves and ultimately facing sharper adjustments.
India’s approach is different. The inflows themselves are being deployed as the primary tool for managing external pressures. Foreign investors seeking rupee exposure inject dollars into the system, naturally strengthening the currency through supply-and-demand dynamics rather than through central bank purchases. Meanwhile, that surplus foreign currency gets reinvested in foreign assets treasury bills, international bonds, safe havens creating a hedging mechanism against future volatility.
Skeptics have questioned whether these inflows merely represent recycled deposits or represent shallow, skittish capital easily reversed. Malhotra dismissed this concern directly, arguing that the evidence points to genuine fresh inflows from institutional investors seeking returns in Indian assets. The distinction matters. Recycled deposits suggest temporary financial engineering; fresh inflows suggest conviction about India’s growth trajectory and asset values.
The broader macroeconomic backdrop reinforces this reading. Inflation remains above the RBI’s 4 percent midpoint target, yet the central bank perceives no signs of broad-based price pressures becoming entrenched the difference between elevated transitory inflation and the structural kind that demands aggressive policy tightening. This assessment has allowed the RBI to maintain a neutral stance on policy rates, retaining flexibility to either hold steady or move in either direction depending on incoming data. This is deliberately calibrated risk management: inflation targeting that doesn’t sacrifice growth on the altar of backward-looking metrics.
The banking sector undergirds this confidence. Indian lenders operate with robust capital adequacy ratios, strong liquidity coverage, and stable funding structures. Credit growth remains buoyant without generating overheating because, as Malhotra noted, lending creates deposits simultaneously the system expands internal resources to match external lending, rather than depleting finite pools. Foreign institutions increasingly acknowledge this confidence: growing foreign participation in Indian banks and non-banking financial companies reflects international conviction about the country’s long-term economic prospects.
Currency markets often price in stories of fragility that fundamentals have already disproven. India’s rupee may have depreciated against the dollar, but depreciation is not weakness. The capital inflows suggest international investors have concluded that Indian assets offer value precisely because the currency isn’t overvalued. The RBI, having created an environment attractive to that capital, faces the unorthodox challenge of an undervalued currency that attracts steady foreign buying rather than one in distress.
What emerges is a picture of external resilience amid global uncertainty not the profile of an emerging economy struggling for relevance, but one whose macroeconomic instruments remain finely calibrated and whose external sector continues attracting money even when global conditions are hostile to emerging markets broadly.
