The Reserve Bank of India (RBI) has launched an aggressive effort to protect the Indian rupee. Hit by a combination of conflicts in West Asia and rising crude oil import bills, the rupee dropped to a record low of 96.96 against the US dollar on Wednesday.
To prevent a chaotic slide, India’s central bank is using a mix of direct dollar sales, banking system liquidity adjustments, and trade rules.
RBI Intervention
According to market data tracked by Reuters, the RBI has been highly active in the spot foreign exchange market. Treasury desks estimate that the central bank has been selling nearly $1 billion per day recently to stop the dollar’s rapid rise.
However, defending the currency has lowered the nation’s financial reserves. Bloomberg reports that India’s foreign exchange reserves (excluding gold) have dropped to a three-year low, which now covers about 8.7 months of imports. Total reserves fell from a peak of $591 billion to around $563 billion as the central bank used dollars to support the rupee.
Indranil Pan, chief economist at Yes Bank, told Bloomberg that “the shock absorber has to be the exchange rate only.” This has started a debate on whether the RBI should let the rupee find its natural level instead of spending its limited reserves.
$5 Billion Liquidity
Because large dollar sales accidentally remove rupee liquidity from the banking system, the RBI announced a countermeasure on Wednesday evening. The central bank will hold a $5-billion dollar-rupee buy/sell swap auction with a three-year term on May 26. This allows local banks to give excess dollars to the RBI in exchange for rupees, pumping roughly Rs 42,000 to Rs 43,000 crore back into the domestic money market.
Treasury experts told Reuters that this move achieves two main goals:
- It refills the RBI’s dollar reserves for the three-year duration of the swap.
- It keeps short-term money-market interest rates stable, protecting the domestic bond market.
“It is essentially a liquidity-management and FX-stabilisation tool rather than a direct rupee-defense intervention,” said Kunal Sodhani, treasury head at Shinhan Bank.
What Top Brokerages and Global Reports Forecast
Major international banks have revised their timelines, noting that global pressures are limiting India’s policy options. Economists Radhika Rao and Philip Wee at DBS Group Research pointed to a stagflation-lite shock caused by fuel supply disruptions and shipping delays. As a result, DBS has raised its USD/INR forecast to a range of 95–100 for the rest of 2026, comparing the current situation to the 2013 taper tantrum and the 2022 energy crisis.
MUFG’s analytical team noted that foreign capital outflows are hurting the rupee. They forecast that USD/INR will move toward 92.00 by the third quarter of 2026, meaning the rupee could continue to lag behind major Asian peer currencies.
Taking a more positive long-term view, Goldman Sachs expects India’s GDP growth to remain strong at 6.9% for 2026. They highlighted that strong NRI remittances and a growing services trade surplus will help balance the widening trade gap.
Policy Firewalls
The government is looking at policy adjustments to protect the capital account. Financial policymakers are studying past currency cycles and are considering several targeted measures:
- Tightening customs checks and evaluating restrictions on non-essential, high-value imports like gold and silver to stop the outflow of dollars.
- Discussing temporary relief on withholding taxes to attract foreign portfolio investors (FPIs) back to Indian markets.
- Looking at incentives for Non-Resident Indians (NRIs) to park money in specialized FCNR(B) dollar deposits, creating a direct source of foreign currency.
