- The RBI has adopted a multi-layered defence strategy to support the rupee this year.
- Rupee gains have been accompanied with distortions elsewhere.
- Authorities are likely not done and remain ready to take further action, if needed.
- Scope of further rate increases is high. Not a panacea but a necessary step.
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Taking stock
The Reserve Bank of India (RBI) has adopted a multi-layered defence strategy to support the rupee this year. This has entailed a combination of outright intervention in spot/ forwards, regulatory action, liquidity steps, administrative measures and moves to curb import-related dollar demand. The rupee has appreciated by 1.8% against the dollar in the past five days since recent measures took effect, paring YTD depreciation to 5.5%. High oil prices, weakness in capital inflows, a firm dollar, tariffs/ geopolitical worries, energy, and risk-off sentiments have kept the INR under pressure since last year.
Echoes of 2013 but with differences
Comparisons with 2013 are apt, though the backdrop differs. As for the catalysts, markets reacted to the US Fed’s taper announcement in 2013, which pushed US yields higher and led global investors to reduce exposure to vulnerable EM economies. As a result, capital inflows weakened, exposing funding mismatches for countries, including India, that were running wide current account deficits.
In 2026, markets face the spectre of elevated oil prices, geopolitical uncertainty, global competition for capital, a firm dollar (DXY appreciated +3.8% YTD), and US inflation/ deficits which have settled at levels much higher than pre-pandemic years. This has pushed up UST yields, and the US Fed kicked off its rate-hike cycle in Sep26.
Against this backdrop, the RBI is pursuing the same objective, i.e., to ensure rupee stability, but the nature of the battle differs. The defence strategy has shifted from ‘crisis management’ mode in 2013, due to weaker domestic macroeconomic balances (a wide current account gap, high inflation, a lower reserve buffer, and wide fiscal deficits), to a ‘terms-of-trade shock and impact of a firm dollar’ in 2026.
FX Playbook
While the response framework is similar between 2013 and this year, the broad sequence and nature of macroprudential measures differ. This year’s multi-layered rupee defence toolkit has included the following steps.
What lies ahead
Authorities are likely not done yet and remain ready to take further action, as required. RBI Governor Malhotra reiterated the authorities’ serious intent of stabilising the currency in a recent interview (Moneycontrol, 13 Oct), emphasising that “The RBI is determined to do whatever is necessary to ensure orderly movement in the foreign exchange market,”. He also highlighted that recent steps were not tantamount to capital control measures that were aimed at ensuring that forex markets serve genuine hedging needs rather than speculative bets. Market participants opine that FX volumes and interest are likely to be subdued in a few pockets on the back of the recent measures, consequently stabilizing the rupee.
Path ahead
Despite these measures, we see limited room for sustained INR appreciation on grounds of manufacturing/ trade competitiveness. A challenging flows portfolio flows outlook leaves the door open to further gradual rupee depreciation subject to global developments, with high sensitivity to oil price movements and risk sentiments. A strong rate response will help introduce favourable rate differentials and reduce currency volatility.
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