The rupee is set to open sharply stronger on Monday after the Reserve Bank of India (RBI) moved over the weekend to curb speculative bets and divert dollar demand from the spot market, but market experts say the relief is likely to be short-lived.
From October 12, the RBI will supply dollars directly to three state-run oil marketing companies. It has also tightened rules on currency derivatives. That may drive the rupee 1% higher on Monday, according to Emkay Global Financial Services.
Central bank to meet oil companies’ dollar needs
The central bank will meet the entire daily dollar requirement of Indian Oil Corp., Hindustan Petroleum Corp. and Bharat Petroleum Corp. through a special window, supplying dollars via designated banks and taking the companies’ purchases out of the spot market.
The rupee closed at 96.73 per dollar on Friday, near its record low of 96.96 in May. It has weakened 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.
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“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.
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RBI tightens rules for forex derivatives
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.
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Economists expect immediate support for rupee
Market participants expect the steps 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.
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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.