Rupee Jumps 1% Against US Dollar After RBI Steps In; What Is Driving The Currency Rally?

The Indian rupee jumped around 1% against the US dollar on Monday, October 12, after the Reserve Bank of India stepped up efforts to support the currency by taking a major source of dollar demand out of the regular market and tightening rules around foreign exchange hedging.

The rupee opened at 95.76 against the dollar, compared with Friday's close of 96.73, and was trading around 95.81 during the session. The rebound comes after the currency moved close to its record low of 96.96 last week and has lost nearly 7% against the dollar so far this year.

At the centre of the RBI's latest action is a special dollar window for Indian Oil, Bharat Petroleum and Hindustan Petroleum, allowing the state-owned oil marketing companies to meet their daily dollar requirements outside the regular spot market. The RBI has also tightened rules around forex derivatives and hedging, targeting another source of demand that has added pressure on the rupee.

“The RBI's latest package is a clear near-term positive for the rupee. It tackles both a large recurring source of dollar demand and the tendency for expectations of rupee weakness to generate additional hedging demand, which can itself amplify depreciation,” said Anindya Banerjee, Head of Research – Currency, Commodities and Interest Rates at Kotak Neo.

Why Is The Rupee Rising Against The Dollar Today?

The rupee's sharp rebound followed the RBI measures announced over the weekend, with the central bank targeting both oil-related dollar purchases and demand arising from currency hedges.

Under the special window, the RBI will sell dollars to Indian Oil, Bharat Petroleum and Hindustan Petroleum through designated banks at prevailing market rates. The three state-owned oil companies are estimated to require roughly $200 million a day for crude oil and petroleum imports.

The measure effectively shifts this recurring demand away from the regular forex market, reducing one source of pressure on the rupee at a time when elevated crude prices have increased India's import bill.

Banerjee said the oil-company window is particularly significant because it takes their entire daily dollar requirement out of the regular market.

The RBI has also tightened rules governing foreign exchange derivatives. The threshold for derivative transactions that can be undertaken without establishing an underlying exposure has been reduced to $5 million from $100 million, while users will have to provide declarations against duplicate hedging. Restrictions have also been placed on rebooking cancelled rupee-linked forex derivative contracts.

Banks will additionally have to maintain a 20% cash reserve against qualifying foreign-currency purchase hedges above $2 million.

Banerjee said the requirement adds a substantial funding burden for banks, which is likely to be passed through to customers and could discourage aggressive front-loading of importer hedges. He, however, clarified that the reserve requirement applies to banks and is not a 20% tax on importers.

Corporate purchases of forward dollars had climbed to a record $77 billion in September, up 80% from a year earlier, as companies increased hedges against further weakness in the rupee.

Banerjee described the latest action as the third phase of the authorities' response to rupee weakness this year. Earlier measures sought to constrain banks' onshore positions and onshore-offshore arbitrage, followed by steps aimed at attracting capital through wider access for foreign investors in government securities and incentives around FCNR(B) deposits and external borrowing.

The latest phase, he said, is focused on tightening hedging discipline while reducing pressure on the regular dollar market.

What Next For The Rupee Against The Dollar?

The RBI's latest intervention comes after sustained pressure on the rupee from elevated crude oil prices, foreign portfolio outflows, high US Treasury yields and strong demand for dollars from importers.

India's foreign exchange reserves have also declined in recent weeks. RBI data showed reserves falling by $12.95 billion to $734.60 billion in the week ended October 2, following an $18.34 billion decline in the previous week.

The recent pullback in crude oil prices has provided some support to the currency, but external pressures remain.

With USD/INR around 95.81, Kotak Neo Research maintains a working range of 94–97. Banerjee expects the RBI to remain particularly vigilant if the currency moves back towards 96.50, with the latest measures helping contain pressure around the 96–96.50 zone. He stressed that this is Kotak Neo Research's assessment of the RBI's likely reaction and not an officially declared exchange-rate ceiling.

A sustained appreciation beyond 94 would require a more durable decline in crude oil prices and an improvement in capital flows, according to Banerjee. Elevated oil prices, high US yields and a strong dollar remain the main external risks.

For now, the RBI measures have eased immediate pressure by targeting two sources of dollar demand at the same time. Whether Monday's rebound develops into a more sustained recovery will depend on crude oil, foreign capital flows and the broader direction of the dollar.

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