Winning Bizness Desk

Mumbai.The Reserve Bank of India (RBI) has introduced a special dollar window for state-owned oil companies and tightened rules governing foreign exchange derivatives to curb the rupee’s slide against the US dollar and limit volatility in the money market.

The measures are aimed at reducing direct dollar demand in the spot market and restricting speculative currency trades without genuine underlying exposure. The rupee closed at 96.73 against the dollar on Friday, October 9, approaching its record low of 96.96, recorded in May.

The currency has fallen more than 7% in calendar year 2026 and around 3.5% in the current financial year, FY27.

• The rupee’s weakness has been driven by high crude oil prices, a stronger US dollar and sluggish foreign investment.
• The RBI is also taking steps to manage market liquidity and discourage speculative positions.

1. RBI moves to prevent rupee breaching 97 level

The central bank is seeking to prevent the rupee from weakening beyond the 97-per-dollar mark, as a breach could trigger panic buying of dollars by companies and encourage speculative short positions.

State-run banks have been selling dollars whenever the rupee weakens beyond the 96.80 level, as part of efforts to contain the currency’s decline. The RBI’s latest measures are intended to ease immediate pressure on the rupee and bring greater discipline to the foreign exchange market. However, the measures may not reverse the currency’s broader downward trend while external economic pressures persist.

2. Special dollar window to ease oil import demand

Crude oil accounts for around 25% of India’s total imports, making oil companies a major source of dollar demand. Under the new arrangement, the daily dollar requirements of state-owned oil companies will be met directly through a special window linked to the RBI’s foreign exchange reserves.

This will reduce their need to purchase dollars directly from the spot foreign exchange market, easing pressure on the rupee. A private bank treasury head said the arrangement would reduce spot-market demand, while restrictions on derivatives without underlying exposure would curb speculative transactions.

3. Rupee may remain under pressure in medium term

Despite the RBI’s intervention, the rupee could remain under pressure in the medium term because of India’s weak balance of payments, a strong dollar and elevated global bond yields. Research analysts say that the measures would help contain volatility and deal a blow to speculators. However, banks could pass on the additional hedging costs arising from the tighter rules to their customers.

The measures are therefore expected to improve market discipline, but the currency’s direction will also depend on broader economic and global financial conditions.

Four major changes in forex derivative rules

On October 10, the RBI announced four key changes to curb speculation and strengthen controls over foreign exchange derivative transactions.

• Lower trading limit: The limit for hedging or trading without evidence of an actual foreign exchange transaction or bill has been reduced from $100 million to $5 million. The restriction also applies to exchange-traded currency derivatives.
• No rebooking of cancelled trades: Once a foreign exchange derivative contract is cancelled, it cannot be rebooked. However, rolling over contracts at maturity will continue to be permitted.
• Risk reserve for large transactions: Companies undertaking transactions exceeding $20 million must maintain a Foreign Exchange Risk Reserve (FERR) equivalent to 20% of the transaction.
• No double hedging: Traders must provide a written declaration confirming that they have not hedged the same underlying transaction or bill through two different banks.
• The changes are designed to restrict large speculative bets, prevent repeated cancellation and rebooking of contracts, and reduce the risk of multiple hedges against a single transaction.

Forex reserves fall by $31.3 billion in two weeks

The rupee’s decline comes amid a sharp fall in India’s foreign exchange reserves. For the week ended September 25, reserves fell by $18.34 billion to $757.46 billion. In the week ended October 2, they declined by another $12.95 billion to $734.61 billion.

The cumulative fall over the two weeks stood at $31.3 billion.

• The reserves are around $51.1 billion below the record high of $785.7 billion reached in early September.
• The decline comes as the RBI seeks to maintain currency stability amid sustained pressure on the rupee.

At the October 7 monetary policy press conference, RBI Governor Sanjay Malhotra said the rupee could be undervalued on the basis of the Real Effective Exchange Rate (REER). He added that the central bank would ensure currency stability.

RBI to sell government bonds worth Rs 25,000 crore

The RBI has announced additional measures to absorb surplus liquidity from the banking system. It will sell government bonds worth Rs 25,000 crore through an open market operation (OMO) on October 13.

The sale will withdraw cash from the banking system and could push bond yields up by four to five basis points, equivalent to 0.04 to 0.05 percentage points. The central bank is also tightening the daily cash reserve maintenance requirement for banks.

From October 16, banks will have to maintain at least 99% of their required Cash Reserve Ratio (CRR) on a daily basis, compared with the existing 90%. The main CRR rate remains unchanged. However, banks will have to manage their daily cash balances more carefully under the revised requirement.

OMO sales and CRR rules to tighten liquidity

Open market operations are used by the RBI to manage liquidity in the banking system. When excess cash is circulating in the market, the central bank can sell government securities to absorb funds from banks.

The process reduces surplus liquidity and helps the RBI manage financial conditions.

• The revised CRR maintenance requirement will also restrict banks’ flexibility in managing their daily cash positions.
• Banks will need to ensure that a larger proportion of their required reserves is maintained every day.

Tighter liquidity management could affect short-term funding conditions and borrowing costs in the financial system.

For ordinary consumers, the impact will depend on how banks adjust their lending, deposit rates and liquidity management in response to the changes.

REER measures rupee’s strength against trading partners

The Real Effective Exchange Rate is an index used to assess the rupee’s value against the currencies of India’s major trading partners, adjusted for relative price differences. It provides a broader measure of the currency’s strength than its exchange rate against the US dollar alone.

A stronger rupee in REER terms can make imports cheaper but may make Indian exports less competitive. A weaker rupee can improve export competitiveness while increasing the cost of imported goods. The RBI’s assessment of the rupee through REER therefore provides a broader perspective on the currency’s value and its implications for India’s external trade.

The central bank’s latest steps combine direct intervention in dollar demand, stricter derivatives rules and tighter liquidity management. While these measures are intended to curb volatility and speculative activity, the rupee continues to face pressure from high oil prices, a strong dollar and developments in global financial markets.