Rupee Depreciation – RBI Measures to Control Forex Volatility

Rupee Depreciation Latest News

• On October 10, 2026, the Reserve Bank of India announced regulatory measures to curb speculative activity in the foreign exchange market and manage volatility amid geopolitical uncertainty and elevated crude oil prices.

Causes of Rupee Depreciation

• Rupee depreciation refers to a decline in the value of the Indian rupee relative to another currency, such as the US dollar. The rupee’s value is influenced by domestic economic conditions, international capital flows and global currency movements.
• As per the RBI’s latest report, the rupee had depreciated by approximately 7% since the beginning of 2026, reflecting several structural and external pressures.
  • Strong US dollar: Global demand for the dollar and elevated international yields make dollar-denominated assets more attractive.
  • High crude oil prices: India’s dependence on imported energy increases its dollar demand and import expenditure when oil prices rise.
  • Foreign portfolio outflows: Withdrawals by foreign investors from Indian equity and debt markets increase demand for foreign currency.
  • Geopolitical uncertainty: The prolonged conflict in West Asia has disrupted energy supply chains and contributed to fluctuations in crude oil prices.
  • Interest rate differentials: Differences between interest rates in advanced and emerging economies influence international investment decisions and currency movements.

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RBI’s Measures to Manage Forex Volatility

• The RBI has announced regulatory changes aimed at improving market discipline and reducing speculative demand for foreign currency.
• Restrictions on cancelled derivative contracts
  • Authorised Dealers (ADs) will not permit users to rebook INR-linked foreign exchange derivative contracts cancelled after the directions were issued. Contract rollovers at maturity remain permitted, subject to regulatory requirements.
• Reduction in the exposure threshold
  • The threshold for undertaking foreign exchange derivative transactions without establishing an underlying exposure was reduced from $100 million to $5 million. 
  • The corresponding threshold for INR-linked exchange-traded currency derivatives was also reduced to $5 million across recognised stock exchanges.
• Additional documentation requirements
  • ADs must obtain and retain an undertaking from users confirming that the same underlying exposure has not been hedged through another dealer.
• Foreign Exchange Risk Reserve
  • For eligible INR-linked foreign exchange derivative contracts with a notional value exceeding $2 million, Authorised Dealers must maintain a Foreign Exchange Risk Reserve (FERR) with the RBI in cash, equivalent to 20% of the rupee value of the notional amount. 
• Together, these measures seek to discourage excessive speculative positions, improve transparency and strengthen risk management in the foreign exchange market.

Other RBI Interventions

• The RBI has also used several measures to address currency volatility and improve the availability of foreign exchange.
  • Dedicated dollar facility for oil marketing companies: Direct dollar supplies to oil marketing companies (OMCs) are intended to divert their bulk crude purchases away from the interbank market and moderate short-term currency pressure.
  • Foreign exchange swaps: Sell-buy swaps in the forward market help manage rupee liquidity and foreign exchange conditions.
  • External Commercial Borrowings: Liberalisation of ECB rules can expand access to foreign funding for eligible Indian borrowers.
  • NRI deposits: Measures to encourage Non-Resident Indian deposits can help mobilise foreign currency resources.
  • Position limits on banks: Restrictions on banks’ net open foreign exchange positions aim to curb excessive proprietary trading.
  • International rupee invoicing: Vostro account arrangements can facilitate international trade settlements in rupees.

Implications for the Economy

• Benefits of intervention
  • RBI intervention can reduce excessive currency volatility and limit the impact of abrupt exchange-rate movements on businesses and households.
  • A more stable rupee can help moderate imported inflation, particularly for crude oil, electronics and edible oils. It can also reduce uncertainty for companies with foreign currency liabilities and improve the predictability of international transactions.
• Costs and limitations
  • Foreign exchange reserves: Direct dollar supplies to OMCs may initially place pressure on reserves, even as they reduce demand in the interbank market.
  • Higher hedging costs: The new reserve requirement and tighter derivative rules may increase banks’ funding costs, potentially widening spreads for customers.
  • Temporary relief: Currency interventions cannot eliminate India’s underlying oil import bill or prevent foreign investors from withdrawing capital.
  • Future repayment risks: Foreign currency deposits and associated swaps can create maturity-related liquidity pressures if large amounts fall due together.

Economic Significance of Rupee Stability

• Exchange-rate stability matters for India’s macroeconomic management through several channels.
• Inflation: A weaker rupee increases the domestic cost of imported goods and commodities, potentially contributing to inflation.
• Current account balance: Higher oil import expenditure increases the value of imports and can widen the current account deficit if export earnings and other receipts do not offset the increase.
• Corporate and banking stability: Companies with unhedged foreign currency borrowings face higher repayment costs when the rupee depreciates, potentially increasing credit risks for lenders.
• Capital flows: Sharp currency movements and expectations of further depreciation can influence investor sentiment and encourage additional capital outflows.

Source: TH