India unveils tough curbs on dollar demand to defend rupee

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The central bank will open a special window to meet the daily dollar needs of three state-run oil-marketing companies.

PHOTO: REUTERS

• India’s central bank unveiled tough steps to defend the rupee, including a special dollar window for state-run oil firms and tighter hedging rules as the currency nears record lows.
• The RBI will supply dollars directly to Indian Oil, Hindustan Petroleum and Bharat Petroleum from reserves, which may ease market pressure but could reduce foreign exchange holdings.
• It also raised costs for derivative hedging and cut transaction limits without proof of exposure, aiming to curb speculation, though oil prices and capital flows still threaten the rupee.

AI generated

MUMBAI – India on Oct 10 unveiled fresh measures to shore up the rupee, redirecting oil companies’ dollar purchases away from the spot market and tightening hedging rules as the currency hovers near record lows.

The steps by the Reserve Bank of India (RBI) come as persistent pressure on the rupee, fuelled by surging oil prices and global bond yields, has driven the currency down by more than 7% in 2026.

The central bank will open a special window to meet the daily dollar requirements of three state-run oil-marketing companies, easing pressure on the spot market.

Under such an arrangement, used during periods of currency stress, the RBI provides oil companies dollars directly from its foreign exchange reserves. Indian Oil, Hindustan Petroleum and Bharat Petroleum will be allowed to access the facility from Oct 12, the RBI said.

“Addressing oil companies’ dollar requirements removes one of the largest sources of demand from the FX market, which should help reduce volatility, but it will show up in a depletion of reserves,” said Dhiraj Nim, foreign exchange (FX) strategist at ANZ Bank in Mumbai.

After the steps were announced, the rupee strengthened by about 0.6% against the dollar in the non-deliverable forward market, albeit in thin trading.

Curbing hedging pressure

Elevated demand for protection against further rupee losses has weighed on the currency in recent months, with importers’ appetite for dollars far exceeding exporter supply.

The RBI has responded by tightening rules on speculative corporate activity and raising the cost of protection against further rupee weakness.

It is “trying to moderate potentially destabilising derivative demand, improve the integrity of underlying exposure verification and discourage circumvention through multiple transactions or repeated rebooking”, a person familiar with the central bank’s thinking said, commenting on condition of anonymity as they are not authorised to speak to the media.

The central bank has mandated that forex dealers maintain a 20% “foreign exchange risk reserve” on derivative contracts used to buy foreign currency against the rupee, for the purposes of hedging current account transactions. The requirement applies to transactions with a notional value exceeding US$2 million (S$2.6 million).

The reserve requirement will lift the cost of buying protection against further rupee weakness, helping to discourage excessive hedging, two bankers said, speaking on condition of anonymity.

The Chinese authorities have previously used similar tools to discourage one-way bets against the yuan.

India’s central bank has also slashed the limits on the size of derivative transactions users can undertake without proof of underlying exposure to US$5 million from US$100 million. The lower cap applies across all derivative products, including exchange-traded futures.

The measures follow more than US$140 billion in capital inflows raised through one-off policy steps to encourage overseas FX deposits alongside offshore borrowing by state-run firms and banks.

Yet despite those inflows, sustained central bank intervention and a rate hike earlier this week, the rupee remains under pressure.

The steps should temper, but not eliminate, pressure on the rupee, ANZ’s Nim said. “The underlying drivers, including oil prices and capital flows, remain, and the real test will be how reserves and the rupee behave in the coming week.” REUTERS