Rupee needs multi-pronged support to hold the line

What measures can help the rupee hold its ground in the current environment? The answer lies in a multipronged strategy.

First, India’s external position remains relatively comfortable. Forex reserves cover more than 10 months of imports, while short-term external debt is less than 20 per cent of reserves. Despite this strength, volatile capital flows account for nearly 64.5 per cent of the reserve base.

With reserves exceeding $700 billion, analysts believe the central bank has sufficient firepower to deter speculative pressures through calibrated intervention in the foreign exchange market.

Second, oil marketing companies (OMCs) should be provided a dedicated forex window by the regulator. This would separate their large dollar demand from routine market activity, offering clearer visibility into genuine demand-supply dynamics. It would also improve the assessment of policy measures aimed at curbing excessive volatility.

Third, the RBI’s move to rationalise banks’ open positions, while well-intentioned, may have widened the gap between onshore and offshore markets. As banks unwind positions, liquidity pressures could intensify, potentially triggering a vicious cycle.

Offshore premiums have already surged, with the one-year NDF premium rising to 4.19 per cent and the one-month premium to 0.67 per cent.

Offshore rates are hovering near Rs98.41 per dollar. According to market participants, the $100 million limit should apply only to trading books rather than the entire bank balance sheet to avoid operational challenges.

Fourth, pressure on the rupee often transmits into debt markets. The regulator may therefore need to consider tools such as Operation Twist, raising short-term yields while easing long-term yields, to keep benchmark rates aligned with policy signals. At the same time, liquidity conditions must be actively managed to support currency stability.

Recent trends suggest that the rupee’s depreciation since February has been more contained compared to currencies that had earlier appreciated sharply. In a highly uncertain global environment, using the exchange rate as a shock absorber has limits beyond a certain inflection point.

While the $40 billion decline in reserves from their peak highlights the RBI’s active intervention, the more significant shift lies in the changing composition of reserves. In FY26, the central bank reduced foreign currency assets by $13.9 billion while increasing gold holdings by $35.7 billion.

This marks a clear pivot towards gold. India is effectively swapping paper assets for hard assets, building a more resilient and diversified reserve base. The growing gold stock, now around $113 billion, acts as a hedge against global inflation and geopolitical risks.

In effect, the RBI appears to be gradually de-dollarising a portion of its reserves. While the headline reserve number may fluctuate, the underlying strategy points to a stronger and more durable external buffer.