Rupee stages stunning ₹1 comeback against dollar: What’s the RBI’s 4-step shock therapy and how long can it last?

The Indian rupee surged nearly ₹1 against the US dollar on Monday after the Reserve Bank of India (RBI) moved to choke off two major sources of pressure on the currency: oil companies’ spot market dollar demand and corporate hedging bets on further depreciation.

The rupee opened at 95.76 to the dollar, up 97 paise from Friday’s close of 96.73. It was the standout performer among Asian currencies, most of which traded in a narrow range.

The rally followed a weekend package of four measures that included a dedicated dollar supply window for three state-run oil companies, tighter restrictions on foreign exchange derivatives, a 20% cash reserve requirement for certain currency contracts and stricter daily cash reserve requirements for banks.


While the measures have given the rupee an immediate policy-driven reprieve, the currency remains down 6.6% this year, while crude oil prices, FII outflows and weak capital flows continue to weigh on the currency.

Also Read | Rupee climbs 1% to 95.76 vs USD after RBI moves to curb dollar demand

What’s the RBI’s shock therapy to save the rupee?

The RBI’s multi-pronged package targets four major pressure points in the currency market: dollar demand from oil companies, speculative foreign exchange positions, hedging costs and surplus banking system liquidity.

1) Dedicated dollar window for state-run oil companies

From today, the RBI will meet the entire daily dollar requirements of IOCL, BPCL and HPCL through designated banks. This will remove their demand from the interbank spot market.

Nomura estimates that India’s monthly oil import bill averaged $16.4 billion between April and August, with the three state-run oil companies accounting for about 55% of that amount. The special window therefore covers a substantial part of the dollar demand generated by one of the country’s biggest import categories.

The move immediately improves the demand supply balance in the spot market and reduces the risk that large oil-related dollar purchases amplify intraday rupee weakness.

2) Tighter rules for foreign exchange derivatives

The RBI has banned the rebooking of cancelled rupee-linked foreign exchange derivative contracts, preventing such transactions from being used for speculative trading under the guise of hedging.

It has also reduced the threshold for undertaking over-the-counter foreign exchange derivative transactions without establishing an underlying exposure to $5 million from $100 million.

Companies will additionally have to certify that the same exposure has not been hedged through another bank. If they have used multiple banks, they will have to disclose the amounts hedged, limiting the scope for synthetic over-hedging.

3) 20% Foreign Exchange Risk Reserve

Under the new Foreign Exchange Risk Reserve, authorised dealers must maintain a cash reserve with the RBI equivalent to 20% of the rupee value of each rupee-linked foreign-exchange derivative contract exceeding $2 million.

The reserve must be maintained daily until the contract expires. On a $10 million hedge, worth approximately ₹100 crore at a dollar rate of 100, banks would have to set aside ₹20 crore.

That raises the funding cost of currency positions and could discourage excessive hedging or speculative bets against the rupee.

4) Stricter daily CRR maintenance

From the fortnight beginning Oct. 16, banks will have to maintain at least 99% of their prescribed cash reserve requirement every day, compared with 90% earlier.

The headline CRR remains unchanged at 3%. However, banks will have less flexibility to manage liquidity on a day-to-day basis. The move will absorb liquidity at the margin and could curb short-term currency speculation.

“The package raises the near-term cost of rupee depreciation trades,” Citi said in a note.

Kotak Mahindra Bank estimates that hedging costs could rise by 1% to 1.6%, while IDFC FIRST Bank estimates an increase of around 1.5%. That could discourage some importers from hedging, reducing demand for dollars in the forward market and easing forward premiums.

“The immediate reaction on INR is expected to be very favourable—likely move of USDINR towards sub-95 cannot be ruled out. Forward premia is likely to soften as OMCs and other importer hedging gets contained,” Kotak Mahindra Bank said.

Nomura said the RBI’s foreign-exchange reserves had fallen by about $43 billion since the FCNR(B) window closed in the first week of September, after the adverse global environment put the rupee under renewed pressure.

The move could reduce the availability of surplus funds for short-term currency speculation and help move the weighted average call rate closer to the repo rate, Nomura said.

The RBI has also announced an additional open-market sale of government securities worth ₹25,000 crore on Oct. 13 to drain durable liquidity.

Nomura estimates that banking-system liquidity has fallen from a surplus of more than ₹11 lakh crore in early September to around ₹5 lakh crore in October so far, partly because of open-market sales, spot-market intervention and foreign-exchange swaps.

Kotak Mahindra Bank estimates that the new measures could withdraw around ₹1.5 lakh crore of durable liquidity if they continue for another month.

IDFC FIRST Bank expects the core liquidity surplus to fall to around ₹2 lakh crore by March 2027 from ₹10.4 lakh crore on Oct. 2, as currency leakage and balance-of-payments pressures add to the impact of the RBI’s liquidity operations.

Also Read | Indian central bank curbs to temper corporate rush to hedge against rupee weakness

RBI’s second line of defence for rupee

RBI’s measures came soon after it completed a $143 billion mobilisation under its swap scheme, including $133 billion of FCNR(B) deposits raised between June and August. The exercise had been expected to bolster foreign exchange reserves and support the rupee.

Yet the currency came under renewed pressure even after the reserve build-up.

Systematix Research said foreign currency assets rose by $104 billion from $544 billion to a peak of $648 billion on Sept. 4, against about $140 billion mobilised under the scheme. Since then, foreign currency assets had fallen to $604.7 billion, suggesting that the underlying external deficit had persisted.

The report calculated that foreign currency assets had risen by only $54 billion since March against $143 billion mobilised, implying a shortfall of about $90 billion in the first half of fiscal 2027, including valuation losses.

That explains why the RBI has shifted from relying primarily on reserves to using administrative restrictions, higher hedging costs and tighter liquidity conditions.

Systematix said the measures echo earlier defensive playbooks used during the 1997-98 Asian financial crisis, the 2011-12 rupee slump and the 2013 “taper tantrum.” In each case, the RBI used restrictions on forward contracts, limits on currency positions or dedicated dollar windows to contain market pressure.

Relief rally or lasting fix?

The RBI’s measures can reduce immediate dollar demand and make speculative rupee shorts more expensive. But the reports are clear that they cannot eliminate the underlying external pressures.

Nomura said higher crude prices were widening the current-account deficit, while elevated US yields and global headwinds were driving foreign portfolio outflows. Systematix also flagged persistent trade deficits, weaker capital flows and the risk of further foreign-investor withdrawals.

“Beyond the initial impact, the rupee’s trajectory will continue to be shaped by crude oil prices, foreign portfolio flows and the broader direction of the US dollar,” Societe Generale said in a note.

There are also longer-term costs. Systematix said tighter documentation and non-earning reserves could act as a tax on hedging, leaving some companies under-hedged. Reduced liquidity and wider bid-ask spreads could push more activity offshore, weaken local price discovery and increase policy-risk perceptions.

The RBI’s options may narrow further if it continues defending the rupee through reserves, because intervention drains liquidity and reduces the foreign exchange buffer.

Nomura said that if global conditions do not improve, policymakers may have to rely on a broader policy toolkit, including greater exchange rate flexibility, further liquidity normalisation, rate hikes, domestic fuel-price adjustments and structural measures to reduce import intensity and boost foreign direct investment.

For equity investors, the currency measures also carry a market cost. Systematix said Indian stocks face a double risk from higher risk-free rates and currency depreciation, alongside rising input and interest costs. Higher bond yields could compress valuations, while increased funding costs could squeeze bank margins.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)