The Indian rupee experienced a modest recovery on Thursday, May 21, following several days of hitting record lows against the US dollar. This uptick was largely attributed to a combination of cooling crude oil prices and decisive intervention by the Reserve Bank of India (RBI) in the foreign exchange market.
The RBI notably announced a $5 billion dollar-rupee buy and sell swap auction, scheduled for May 26, aimed at bolstering liquidity within the banking system. Additionally, the central bank actively sold dollars to shore up the domestic currency, which had previously closed around 96.8 to the dollar. These actions helped the rupee strengthen by approximately 0.5% in morning trading, settling at 96.37 against the greenback.
Why the Rupee is Under Pressure
Despite the RBI's efforts, the rupee remains under considerable pressure. Several factors contribute to its depreciation:
- Geopolitical Tensions: Escalating conflicts, particularly in West Asia, have disrupted supply lines through the Strait of Hormuz and impacted crude oil and gas assets. This has led to soaring energy prices, significantly hurting major importers like India and widening the current account deficit.
- Global Economic Shifts: High US bond yields, currently around 5%, draw foreign institutional investors (FIIs) towards the perceived safety of developed markets. This trend diminishes interest in emerging markets like India, leading to sustained FII selling and further pressure on the rupee.
- Inflationary Risks: The Indian government has already raised petrol and diesel prices twice and hiked import duties on gold to manage demand for import-dependent items. A weakening rupee exacerbates inflation risks, especially with elevated global energy costs.
DBS Bank analysts Radhika Rao and Philip Wee highlighted that a weaker rupee amplifies the war-related oil import bill and discourages equity inflows. They noted that the rupee has depreciated over 6% against the dollar in 2026 and now forecast it to trade within the 95-100 range through the remainder of the year, a revision from their earlier 90-95 projection.
RBI's Future Strategy and Historical Precedents
RBI Governor Sanjay Malhotra has previously stated that the central bank intervenes only when there is excessive volatility or speculation, not to target a specific exchange rate. With forex reserves nearing $690 billion, the RBI possesses significant capacity for intervention.
Analysts anticipate the RBI may need to implement further measures if oil prices remain above $100 a barrel. Potential steps include:
- Repo Rate Hike: An increase of 50-75 basis points in the repo rate (currently 5.25%) by March 2026 is widely expected to manage inflation and support the currency.
- Special Deposit Schemes: Similar to past initiatives, the RBI might introduce schemes to attract non-resident inflows, such as dollar deposits.
- Other Monetary Tools: These could include reducing withholding tax on debt investments, closer scrutiny of outbound Foreign Direct Investment (FDI), and encouraging foreign currency bond issuance by state entities.
India has historically utilized such measures to stabilize its currency. In 2013, the RBI allowed banks to mobilize dollar deposits from non-resident Indians, bringing in around $26 billion. Earlier, in 1998, Resurgent India Bonds raised $4.2 billion, and in 2000, India Millennium Deposits mobilized an estimated $5.5 billion. Such currency swaps and deposit schemes may again be explored if the rupee continues to slide.