The Rupee’s Rise and the Limits of Defending It

The rupee gained 0.99% on October 12, closing at ₹95.78 against the US dollar. This was its biggest single-day gain since April 2, 2026. In the previous trading session, it had closed at ₹96.74 per dollar. The recovery followed the announcement of fresh measures, including a special arrangement to provide daily dollar supplies to government-owned oil marketing companies.

On April 2, the rupee had also recorded a gain of nearly 1% in a single trading session. At that time, the Reserve Bank of India (RBI) barred banks from offering rupee-denominated non-deliverable forward contracts to resident and non-resident clients. This followed the central bank’s decision to cap banks’ net open positions in the domestic market at $100 million. The move forced banks to reduce their positions and sell dollars.

These measures change when and where dollars are purchased, but they do not alter the underlying demand arising from oil imports, trade and capital outflows.

In addition, authorised dealers will be required to maintain cash with the RBI equivalent to 20% of the rupee value of each foreign exchange derivative contract linked to the rupee, with a notional value exceeding $2 million. The aim is to curb speculative activity and ease pressure on the rupee by restricting derivative trading or making it more expensive. However, these measures offer only temporary relief and do not address the underlying problem. They could also hurt genuine businesses that use hedging to manage foreign exchange risks.

The RBI has, in fact, been intervening heavily in the currency market to support the rupee. Concessional swap arrangements, including those linked to Foreign Currency Non-Resident (Bank), or FCNR (B), deposits, have helped augment foreign exchange reserves. The central bank’s stated policy is that it does not target any specific exchange-rate level and intervenes only to contain excessive volatility. However, its actions suggest that it may also be pursuing other objectives.

It is important to recognise that managing balance-of-payments pressures is not solely the responsibility of the central bank. India is facing pressures on both its current and capital accounts, and these challenges existed even before the Iran war. Over the past two years, India has recorded balance-of-payments deficits, partly due to capital outflows. This year, strong capital inflows under the FCNR (B) route are expected to help produce a balance-of-payments surplus.

However, these inflows are also likely to provide only short-term relief.

The RBI’s recent actions suggest that its interventions may not be delivering as much support as many had expected. One possible option now is to allow the rupee to depreciate. However, this would lead to a fundamental improvement only if Indian exporters can take advantage of a weaker currency.

For that to happen, the government must implement necessary reforms, including tariff-related changes, and create a more favourable environment for attracting foreign direct investment (FDI). Without such structural reforms, measures to support the rupee are likely to provide only temporary relief.

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