Effects of Capital Flows on Macroeconomic Variables: 
This section theoretically explains the economic relationship between capital inflows and macroeconomic variables such as exchange rate,  money supply, foreign exchange reserve and interest rates, etc, in  India. Some commonly observed effects of capital inflows are exchange rate appreciation, monetary expansion, foreign exchange reserve accumulation and interest rate.  
Impact of Capital Flows on Exchange Rate: 
Foreign capital inflows will raise the level of domestic expenditure in economy, which will raise the demand for non-tradable goods that result in an appreciation of the real exchange rate. The price adjustment process then leads to a reallocation of resources from tradable and non-tradable goods. The rise in aggregate expenditure  also increases the demand for tradable, leading to rise in imports and  widening of the trade deficit 
The capital inflows have been associated with real exchange rate appreciation in India. 
The circumstances indicate that policy responses is undoubtedly a major factor in thwarting appreciation pressure upon the real exchange rate closer to the march 1993 level.  
A policy response prevailed in India over the real exchange rate appreciated in response to capital inflows in 1996-97 and the appreciation was reduced by 9 percent in December 1997. The capital inflows contributed both to real exchange rate appreciation and reserve accumulation in this country. This can be affected by changes in terms of trade, Government spending and monetary as well as exchange rate policies. 
There is a lot of chatter in money market circles that RBI should not allow a runaway appreciation of the rupee. As of now the rupee has appreciated 12.5 percent from its all-time low scaled on Aug 28 and again on September 4. However,  the rupee is still 11 percent cheaper year-to-date and 15 percent cheaper than year-ago levels. 
The RBI has to bring the marginal standing facility (MSF) rate down to 100 bps over repo. It needs to dismantle the limits placed on repo borrowing so that the call rate is aligned with the repo rate. Then it has to slowly bring in the oil demand into the market. Only then can we consider whether the rupee has stabilised. Even then, it won’t be easy for RBI to start buying dollars to prevent rupee appreciation all that easily. Any such purchase can lead to an overreaction in the market leading to a sharp rupee fall and a vicious chain reaction. 
RBI buying dollars in spot market & selling it in forward market to stabilise rupee 
The Reserve Bank of India, under GovernorRaghuram Rajan, seems to have changed its strategy when it comes to defending the fragile rupee and managing liquidity. The central bank, which earlier used to sell dollars in the local markets, is now increasingly buying the US currency in the spot market and selling it in the forward market. The revised strategy seems to be having a bearing on the non-deliverable forwards, or NDF, market. 
The move, experts say, is aimed at not only stabilising the local currency but also managing liquidity, as there was a surge in inflows after banks were allowed to swap Foreign Currency (Non-Resident) Accounts (Banks), or FCNR (B), proceeds for a premium.