The freeware software TREESIZE can show me everything that Windows Explorer cannot display.
Scan C:\ and have a look at what is found under
"C:\System Volume Information"
You can inspect the size and name of every Restore Point item. and keep the display open
You can then defrag and Treesize display should not be affected.
Then select the TreeSize menu "File" and click on "New Instance" and a second Treesize display appears
Now Scan C:\ and have a look at what is now found under
"C:\System Volume Information"
You should now see the difference between the displays.
I know that under Windows XP I would observe a series of folders with incrementing subscripts such as RP1234, RP1235, etc.
and within each a series of files such as A23456.exe, A23457.dll, A23458.BAT etc.
Each of these Annnnn files has a new name but with its original extension,
and one or more change.log files will identify the original names of these Annnn files.
Windows XP taught me not to trust System Restore so I have never used it under Windows 7 and do not know if it has a different naming convention.
You should be able to identify from the two Treesize displays the new Annnn files, and the largest of them.
From Change.log (or whatever it is called) you can identify the original file that was "protected" by Windows.
Perhaps that is a special file with special mystical properties, and perhaps excluding that from defragging would solve your problem.
I bitterly remember that XP does not trust XP,
and when I accepted its "Disc Cleanup" option it happened to compress a registered *.CPL file (or some-such),
and immediately Windows File Protection demanded that it be fixed because it did not match the manifests it was registered under
(I am saying what I remembered)
and required a System File Check with Installation Discs that were never provided.
I wish you luck.