RBI supplements financial muscle with regulatory heft

Measures to curb dollar demand have strengthened the rupee, but raise costs for importers and leave the durability of the recovery uncertain

Last week, the Reserve Bank of India (RBI) sent a strong message that it will change the rules of the game in the foreign exchange (forex) markets anytime by, besides other measures, imposing heavy costs for forward purchases of foreign currency by importers. The sledgehammer blow strengthened the rupee from nearly 97 to 95 against the US dollar but left unhedged exporters gaping at lower realisations in rupees than they estimated and importers staring at payments against forward contracts higher than prevailing spot rates.  

The RBI says that its policy is not to target any exchange rate but to curb excessive volatility in the forex markets. Its actions suggest concern about the level too. On May 20 this year, the rupee depreciated to almost 97 to a US dollar, before recovering in subsequent days. To augment the supply of foreign currency, the RBI introduced, in early June, concessional swap facilities against Foreign Currency Non-Resident (Bank), or FCNR(B), deposits, banks’ overseas foreign currency borrowings and public sector external commercial borrowings. Although about $143.6 billion was mobilised under these facilities, expectations of further rupee depreciation could not be quelled. Crude oil prices and foreign investors’ withdrawals continued to put pressure on the rupee. Importers continued to book their exposures forward and many exporters left their positions open. RBI regularly sold foreign currency to support the rupee. Its reserves fell from $785.706 billion on September 4 to $726.027 billion on October 9, although valuation changes also affected the reserves. On October 9, the rupee closed at 96.73. 

The RBI decided to act, this time by curbing demand for foreign currency. It provided a dollar window for public sector oil companies, tightened documentation, prohibited rebooking cancelled rupee derivative contracts and introduced the Foreign Exchange Risk Reserve (FERR), requiring banks to maintain non-interest-bearing cash equal to 20 per cent of qualifying contracts’ rupee notional value. That raised costs for importers booking new hedges. Those holding existing forward contracts could roll them over but not cancel and rebook them to take advantage of lower rates.  

The rupee closed at 94.96 on Friday, gaining nearly two per cent during the week. The RBI clarified that market-making and proprietary transactions are excluded from FERR. That reduced uncertainty but did not remove the additional cost of qualifying hedges. 

The domestic forex turnover has nearly doubled from $41 billion daily in FY22 to about $80 billion. Outstanding rupee derivatives have increased nearly fourfold since FY21 to about ₹130 trillion. The daily rupee trading worldwide increased from $119 billion in 2022 to $185 billion in 2025. These figures do not represent equivalent net demand for dollars but demonstrate the expanding scale and international reach of the market in which RBI intervenes. Selling dollars can relieve immediate pressure; countering persistent expectations of depreciation can require repeated drawdown of reserves. The recent measures suggest that RBI sought to supplement its financial firepower with regulatory power, changing the costs and conditions of transactions to restrain dollar demand. 

The recent measures make protection more expensive for genuine importers. Whether the costs imposed on trade are justified by the gains and whether they will sustain the recovery remain uncertain. The structural factors that cause the weakening of the rupee have not gone away.  

The traders should remain cautious, always remembering that RBI has its own priorities.