RBI's Latest Attempt to Shield Rupee May Bring Near-Term Rebound

India’s Reserve Bank of India (RBI) has taken a series of aggressive steps to stabilize the domestic currency amid heightened volatility. On April 1, it banned authorized dealers from offering rupee non-deliverable forwards to clients, a move that follows a recent $100 million cap on banks’ net open positions in the foreign exchange market. These actions aim to curb speculation and reduce arbitrage opportunities in both onshore and offshore markets.

The rupee has faced sustained pressure due to global geopolitical tensions, particularly the Iran war, and rising oil prices, which have triggered capital outflows and increased import costs. This has led to a sharp depreciation, with the currency hitting an all-time low of 94.8400 against the dollar on March 31. The central bank has been actively intervening in both the onshore and NDF markets to slow the pace of the rupee’s decline.

Recent measures are expected to create a short-term bounce in the rupee as banks unwind large arbitrage positions. These include unwinding dollar positions previously taken to exploit spreads between onshore and NDF markets. Analysts estimate these positions could range between $25 billion to $50 billion.

Why the Move Happened

The RBI’s decision to restrict non-deliverable forwards and impose tighter position limits is a response to the growing influence of offshore speculation against the rupee. By banning NDFs and limiting onshore exposure, the central bank aims to reduce the divergence between onshore and offshore pricing, which has worsened with increased volatility.

The timing of the intervention is critical. India’s foreign exchange reserves have fallen for three consecutive weeks, declining by $30.14 billion in March alone. This pressure has been exacerbated by a sharp drop in gold reserves and a widening net short dollar position in the forward market.

How Markets Responded

The immediate impact of these measures is expected to be mixed. While the rupee is likely to see an initial rebound as arbitrage positions unwind, the underlying pressure from global oil prices and geopolitical uncertainty remains. The currency closed at 94.8325 per dollar on Monday, down over 4% since the start of the Iran war.

Market participants remain cautious. Currency traders have noted wide spreads and choppy price action following the announcements. Some expect the rupee to stabilize in the short term, but long-term trends will depend on global developments, including the trajectory of the Iran war and international oil prices.

What Analysts Are Watching

Analysts are closely monitoring the effectiveness of these measures in curbing speculative activity. The success of the intervention will depend on the pace of arbitrage unwinding and the extent to which banks adjust their forex strategies. Experts also highlight the need for the RBI to balance short-term stability with longer-term currency resilience.

The central bank’s ability to defend the rupee is seen as limited in the absence of broader structural reforms. With forex reserves at $698.35 billion as of March 20, the import cover is now at 9.4 months after accounting for forward positions. Further depreciation could strain reserve adequacy, especially if the Iran situation escalates.

Market watchers are also paying attention to the forward book deficit, which is estimated to have grown to around $100 billion by the end of March. This represents a key risk for the central bank’s intervention capabilities and could limit its ability to act as a market stabilizer in times of heightened volatility.

Investors remain on edge as they await further regulatory actions and monitor the trajectory of the rupee against global benchmarks. With oil prices and geopolitical risks continuing to weigh on India’s economic outlook, the RBI’s ability to restore confidence in the currency will be tested in the coming weeks.