Rupee set for a rebound on RBI curbs, but depreciation pressure persists

The rupee closed at 96.73 per dollar on Friday, near its record low of 96.96 in May. It has depreciated nearly 8% so far this calendar year and 11% in FY26, according to Bloomberg data.

While the RBI's measures could support the rupee in the near term, market participants said they are unlikely to reverse its longer-term depreciation trend, with high crude oil prices, capital outflows and adverse balance of payments dynamics continuing to weigh on the currency.

“Over the medium term, the rupee will still depreciate because that depreciation is a function of multi-year high US Treasury yields and crude oil at $100,” said Gaura Sengupta, chief economist at IDFC FIRST Bank. “That dynamic has not changed. Maybe the pace of depreciation will be softer because increasingly it looks like RBI is taking stronger measures. So, maybe more measures are in store.” Sengupta expects the rupee to trade in the 96.50-97 range by the end of March.

A weaker rupee makes imports more expensive, adding to inflationary pressures and potentially weighing on economic growth by raising input costs for businesses and squeezing household purchasing power. India is particularly vulnerable because it imports about 90% of its crude oil requirements, making the currency's weakness an added burden when global oil prices are elevated.

FX measures

In a separate circular, the RBI announced four additional measures to curb speculative activity in the foreign exchange market. These include barring the rebooking of cancelled rupee-linked foreign exchange derivative contracts, lowering the threshold for derivative transactions without an underlying exposure to $5 million from $100 million, and requiring clients to submit an undertaking confirming that the same underlying exposure has not been hedged through another authorized dealer.

The RBI also introduced a Foreign Exchange Risk Reserve (FERR), requiring banks to maintain a cash reserve with the central bank equivalent to 20% of the rupee value of qualifying derivative contracts exceeding $2 million, where clients buy foreign currency against the rupee to hedge current account exposures.

The measures amount to significant curbs on speculative trades, said Madhavi Arora, chief economist at Emkay Global. “Rupee liquidity is high and the rupee is cheap to short in offshore and onshore markets. All these moves tighten speculative positioning and give some direct support to the INR,” she said.

Market participants expect the measures to provide immediate support to the rupee and ease pressure on forward premiums by discouraging aggressive dollar buying and speculative positions against the currency. However, the measures could also raise hedging costs for importers, with banks likely to pass on some of the additional costs to clients, economists said.

Importers are currently increasing their hedging, while exporters are holding back because they expect the rupee to depreciate further.

Weakening bias

Dhiraj Nim, foreign exchange strategist and economist at ANZ, expects a sharp initial rally in the spot market, with forward premiums potentially falling by 50 basis points or more. However, he cautioned that the measures would buy time for the central bank rather than fundamentally change the rupee's trajectory.

“If the underlying balance of payments dynamics do not improve, then it just brings you back to the same situation that you thought we are in today,” Nim said. He expects the rupee to weaken to 97.50 over six to 12 months.

India's balance of payments (BoP) surplus rose sharply to $20.9 billion in July from $2.9 billion in June, driven by foreign currency non-resident bank (FCNR(B)) deposit inflows. The RBI announced a dedicated window for such deposits on 5 June to attract dollar inflows and support the rupee.

However, the underlying external sector position remains weak. The BoP balance excluding NRI deposits was negative at $12.7 billion in July, compared with a deficit of $10.9 billion during April-June, reflecting subdued capital inflows, particularly weak foreign portfolio investor (FPI) flows.

The FCNR(B) deposit window closed ahead of schedule on 31 August, while the windows for external commercial borrowings (ECBs) and overseas foreign currency borrowings remain open until 31 December. As of 18 September, the three windows had attracted $143.6 billion in inflows, of which 93% came through FCNR(B) deposits, according to RBI data.

These inflows also helped lift India's foreign exchange reserves to $765 billion on 18 September from $681 billion on 5 June. Reserves subsequently fell to $734 billion as of 2 October, amid likely RBI intervention in the foreign exchange market to curb volatility.

The RBI's decision to meet the oil companies' dollar requirements through its own window will also prompt market participants to monitor the central bank's foreign exchange reserves more closely, Nim said.

Ritesh Bhansali, deputy chief executive officer at Mecklai Financial Services, said the measures would have a limited impact because they primarily affect the onshore market, where trading volumes are lower than offshore.

“They are only going to impact the onshore market, while volumes are much higher in the offshore market. Foreign investors and banks can still operate there, so the question is how effectively the RBI can contain those positions,” he said.

Bhansali expects the rupee to trade in the 95.50-96 range by the end of the financial year and does not expect it to breach 97.50.

Subhana Shaikh

Subhana Shaikh is a business journalist at Mint, where she covers the Reserve Bank of India, monetary policy, and India’s bond markets. She has seven years of experience in reporting on financial markets, with a focus on banking and the broader financial system.She began her career after completing her postgraduate diploma at the Indian Institute of Journalism and New Media, Bengaluru. She then spent five years at Informist Media, a news wire agency, where she closely tracked bond markets and the BFSI sector, developing a strong foundation in market reporting. She later moved to NDTV Profit, where she expanded her coverage across a wide range of business and economic stories.At Mint, Subhana focuses on explaining central bank decisions, bond market movements, and banking trends for her readers. Her reporting combines on-ground inputs with careful analysis to help audiences understand complex financial developments.Based in Mumbai, she is interested in exploring stories across the business landscape. Outside of work, she enjoys reading and spending time with her three cats.