There may be some reasonable answers to that — for example, that the same foreign investors are partly responsible, in that they’re pulling money out at record rates. Foreign portfolio investors have withdrawn over ~3 trillion from Indian equities so far this year. That’s already 1.8 times the amount they took out in all of 2025. And it appears to be accelerating; September was a six-month high with net withdrawals of ~0.35 trillion, and the same number for the first 11 days of October was already ~0.44 trillion.
But another question is far harder to answer: Why, precisely, can’t we let the rupee depreciate? Once again, the Reserve Bank of India (RBI) feels called upon to defend the currency against “speculation”. This rarely makes sense, particularly as the sight of a central bank mounting a defence attracts actual speculators the same way as blood in the water attracts sharks. Anything that looks like an implicit peg is a particularly bad idea. Speculators can usually view such a thing as an easy asymmetric bet — a licence to print money. Central banks should go out of their way to avoid giving traders any such impression. The RBI, however, seems to have forgotten this rule: It is being generally reported that many believe it has set a floor for the rupee-dollar exchange rate at ~97 to the dollar.
Reuters has reported that traders estimate the central bank has already deployed $75 billion-80 billion on this defence, through spot sales and swaps, over the past four months. There may be no shortage of dollars in the RBI’s coffers at the moment – particularly given the inflow of $133 billion through the foreign-currency non-resident deposit scheme took reserves to a record high in September — but $75 billion is nevertheless a lot of money.
It is possible that the central bank genuinely believes that all this is transitory, and that the rupee is undervalued. Certainly, the governor has himself said in the past fortnight that this might be true, judging against measures like the six-currency real effective exchange rate (Reer). Analysts from HDFC Mutual Fund agree, saying that Reer has fallen to 10 per cent below its 10-year average, a mark last seen during the 2013 “taper tantrum”.
So what we’re being told is that markets are irrational. Fine, sometimes they are. But that’s not a good enough reason to fight them. Individual investors often have to be reminded that the market can stay irrational longer than they can remain solvent. That does not apply to central banks, perhaps. But even they might find that markets can stay wrong after they’ve deployed all their firepower.
Let’s look at what’s already been done. The non-resident Indians’ bank-deposit scheme was one effort to reduce pressure on the rupee. That made up for some of the hits the RBI took in late March and early April, when it intervened both by selling dollars and by using offshore derivatives. It restricted banks using the onshore forward market; capped net open positions; and later, it cracked down on non-deliverable forwards. By October, it had also raised rates and started tightening liquidity.
In each case, the positive effect on the rupee’s value has largely been transient, while the negative effect of heavy-handed regulation may last longer. Certainly, that’s what seems to be the case when one looks at the cost of hedging against a weaker rupee. The three-month yield on onshore dollar-rupee forwards — how much extra you have to pay to secure dollars against delivery three months ahead — reached 6.54 per cent. (The same measure was 1.09 per cent in November 2023.)
That came after the latest, most sweeping measures from the RBI, which attempted to detach the oil-marketing companies’ dollar demands from the broader market, as well as various other controls on derivatives, including requiring authorised dealers to keep cash with the central bank worth 20 per cent of each high-value derivative contract. Global macro analysts compare this to the tools that the People’s Bank of China uses to manage the yuan. Research by IDFC First Bank suggested this new reserve requirement might itself raise hedging costs by about 1.5 per cent.
This will hit not just importers, who will find themselves more exposed to further rupee depreciation – indeed, some reports emerged that banks were simply refusing to sign contracts with smaller companies and shut down online portals that did so — but perhaps also exporters with thin margins such as those in the readymade garments business. Leaving exposure unhedged naturally increases financial vulnerability all round.
It is too soon to declare that what we have seen over the past few months is a major reversal of India’s decades-long trend towards liberalising the foreign-exchange market. But market participants are saying quite openly that it is. That should worry us, because such perceptions are self-reinforcing.
And, at the end of the day, the reason that there is demand to hedge against a falling rupee is because most people believe that the currency has further to fall. Denying them the opportunity to hedge will not change their beliefs in any way. And beliefs are what determine market prices, including exchange rates.
A depreciating rupee is not in itself something that should terrify us. Why does it continue to sink? Well, because of the real fundamentals of the Indian economy: It imports too much and does not export enough. You can plug this gap for a while with capital inflows; but, eventually, those may reverse. Then you can try to use reserves or regulation. But none of that changes the fundamental supply and demand equation. Seeing this imbalance, the market attempts to address it by making imports more expensive, so we buy less of them, and making our exports cheaper, so foreigners buy more of them. Fighting this natural process is neither effective nor in the long-term national interests.
