Should RBI step in with more measures to stabilise the rupee?

The rupee has continued to depreciate, sliding past the 95 to the US dollar mark on Monday, despite the Reserve Bank of India’s (RBI’s) efforts to shore up the currency amid the ongoing conflict in West Asia and continued sales by foreign institutional investors.

Even the central bank’s recent directive to banks to cap their open rupee positions at $100 million, which initially helped pull back the rupee, couldn’t stop the subsequent dip. Thus, all eyes are now on the RBI and what it plans to do next.

The rupee has slipped close to 10% in the financial year 2025-26 (FY26), its worst annual drop in more than a decade. Geopolitical tensions, trade-related uncertainties and the higher import tariffs that had been imposed by the US administration last year put the rupee under pressure. This was exacerbated by the conflict in West Asia, which has driven up oil prices.

Besides, foreign portfolio investors have kept the relentless pace of their selling. According to data from NSDL, FPIs pulled out over Rs 1.80 lakh crore from India’s equity market in FY26, on top of the Rs 1.27 lakh crore they pulled out in FY25. The FPI selloff puts more pressure on the rupee as dollar demand rises.

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Japanese banking giant MUFG said that the RBI directive to banks wouldn’t be enough to stop the rupee from falling. “Over the medium-term, we continue to think that the fundamental flow still points towards a weaker rupee moving forward, especially if the Iran and [West Asia] conflict is prolonged and escalates further,” it said.  

The MUFG analysts felt that while it made perfect sense for the RBI to “implement policies to try to break one-way bets” on the rupee, especially if it were to reach levels that would push up inflation expectations and weaken financial stability, what was needed for the rupee was more sustained capital inflows.

“This time around it’s not just about oil prices but also energy shortages, coupled with indirect effects including higher fertiliser and food prices, weaker remittances, disruption to travel and transportation, coupled with weaker trade with the Middle East for India,” it said.

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Soumya Kanti Ghosh, Group Chief Economic Adviser of the State Bank of India, stated that India’s foreign exchange reserves of $700 billion were sufficiently strong to deter any speculative moves by intervening in the forex market.

“There is no reason to suggest that we should use forex reserves for rainy days only as is being mentioned, and we believe there is still time to intervene in the market to prop up the rupee if it is so desirable,” said Ghosh.

Back in 2013, when there was a huge flight of capital after the US Federal Reserve signalled the withdrawal of its quantitative easing policy, the rupee had plunged from 54 to 68 to the dollar in 103 days, forcing the RBI to take several measures to protect the rupee.  

At that time, the RBI opened a special forex swap window for three public sector oil marketing companies (OMCs) to meet the entire daily dollar requirements. It also offered a special concessional window to banks to swap the fresh FCNR (B) dollar funds mobilised for a minimum tenor of three years and above at a fixed rate of 3.5% per annum for the entire tenure of the deposit. These steps resulted in total flows of $34 billion, according to Ghosh. However, given that the present scenario is different, those measures may not be desirable now, Ghosh feels.    

He noted that the RBI could open a special window for OMCs. That would separate OMCs’ daily demand of dollars of around $250-300 million from other market operations.

“Putting refinance or swap mechanisms around such a special window to OMCs can ensure no near-term pressure on the exchange rate dynamics. This should allow better visibility on genuine forex demand and supply dynamics and in measuring the efficacy of various countermeasures initiated by the regulator to curb unwarranted volatility,” said Ghosh.

While the central bank has always stepped in to support the rupee, it may be time to incorporate alternative mechanisms like the dollar window for OMCs, since the fall of the rupee exceeds the macro fundamentals of the country by a wide margin, Ghosh said.