The Indian Rupee closed at a two-month high of 94.95 per US dollar, appreciating by about 21 paise. This rally occurred despite crude oil prices hardening to around $91 per barrel and geopolitical tensions in West Asia. The key drivers behind the rupee's strength include robust Foreign Currency Non-Resident (Bank) (FCNR(B)) deposit inflows under the Reserve Bank of India's (RBI) concessional swap facility, and apparent intervention by the RBI in the non-deliverable forward (NDF) market. Market players estimate that banks mobilized FCNR(B) deposits of $80 billion during the period the concessional swap facility was available, from June 8 to August 31, 2026. These inflows contributed to India's foreign exchange reserves soaring to an all-time high of $729.328 billion in the week ended August 21, marking a jump of $12.422 billion in that week alone.
Further bolstering the rupee's performance was India's strong economic growth. The Q1 FY27 GDP growth was estimated at 7.8%, exceeding expectations and reinforcing investor confidence in India's resilience despite global uncertainties. This strong growth was attributed to upbeat domestic consumption, continued government spending, investments, and healthy export performance. Additionally, the central government's fiscal deficit for 2026-27 stood at 26.8% of the full-year target at the end of July, a significant improvement from the previous year, which also provided support to the currency.
The RBI's active intervention played a crucial role in managing the rupee's volatility. The central bank is believed to have intervened in the NDF market before the Indian forex market opened and continued to sell dollars in the spot market. This increased the availability of dollars, counteracting pressure on the rupee. Analyst Dilip Parmar of HDFC Securities noted that the rupee is on a winning streak, outperforming Asian peers, partly due to the central bank stepping in with dollar supplies. Abhishek Bisen of Kotak Mutual Fund highlighted that the FCNR(B) deposit flows more than offset the pressure from rising Brent crude prices and expectations of a possible US Federal Reserve rate hike.
Despite the positive momentum, some market observers note potential headwinds. Foreign institutional investors (FIIs) have been net sellers in the equity market, offloading shares worth $7,985.88 crore on a net basis on Monday, and are net sellers of around $24.6 billion so far in 2026, even though August saw $3.1 billion in inflows. However, the immediate impact of the strong FCNR(B) inflows, strong GDP data, and RBI intervention has outweighed these concerns, leading to the rupee's current appreciation.
