The rupee recovered against the US dollar on Thursday, May 21, after consecutive days of touching record lows. Thursday’s gains were driven by cooling oil prices, but also importantly, due to the Reserve Bank of India stepping in, in the foreign exchange market through the sale of the dollar to shore up the currency.

  The rupee, which had closed around 96.8 to the dollar, strengthened around 0.5% in the morning trading to around 96.30. It eventually settled at 96.37 against the greenback.

  "This recovery follows a retracement in crude oil prices amid tentative signs of easing geopolitical friction, alongside active central bank intervention," said Nandish, deputy vice-president at HDFC Securities.

  On Wednesday evening, the Reserve Bank of India (RBI) announced a $5 billion dollar-rupee buy and sell swap auction scheduled for May 26, in a bid to boost liquidity in the banking system. Essentially, banks would sell US dollars to the RBI and simultaneously agree to buy the same amount in rupees. The trade reverses at a pre-agreed rate on a future date.

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  The central bank is said to have intervened in the forex market on Thursday to stabilise the sliding rupee, and the expectation is that it may have to look at more options to shore up the rupee, particularly if the war drags on for a few more weeks and months, which will keep oil prices elevated and in turn hurt big importers like India, and pressure the current account deficit.

  Since the US and Israel launched a war on Iran, the supply lines through the Strait of Hormuz have been impacted, which, coupled with strikes on a few crude oil and gas assets in West Asia, has led to energy prices soaring. This has impacted India’s economy hard. After leaving prices unchanged since the war began, petrol and diesel prices have been raised twice since last Friday. That has fuelled risks of inflation in the coming months.

  A weakening rupee and its looming impact on the economy have also hit equity market sentiments, which have seen a relentless selling by foreign institutional investors, in turn further putting pressure on the rupee.

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  US bond yields are already at around 5%. Generally, in uncertain times like the world is currently in, foreign investors prefer the safety that developed markets like the US markets offer. More so, if the US bond yields are high, then it diminishes the interest in emerging markets and therefore FIIs sell even more.

  “A weaker rupee amplifies a higher war-related oil import bill and discourages investor equity inflows,” noted Radhika Rao, senior economist at Singapore’s DBS Bank and Philip Wee, senior FX strategist at DBS Bank.

  They pointed out that the rupee had depreciated by over 6% in 2026 against the dollar and now see the rupee within the 95-100 range through the rest of 2026, compared with their earlier expectation of a 90-95 range.

  The RBI has forex reserves of close to $690 billion, and RBI Governor Sanjay Malhotra has stressed in the past that the central bank doesn’t have a target in mind but will intervene only when there is excessive volatility or speculation.

  With the rupee likely to remain under pressure, particularly if the oil prices stay above $100 a barrel, the RBI may have to initiate a few more steps, analysts said.

 “Indian policymakers will want to stabilise the undervalued rupee. Against elevated global energy prices and (US President) Trump’s tariffs’ legal defeats, they will likely prioritise inflation management and financial stability over export competitiveness,” said Rao and Wee.

  They pointed out that since the global financial crisis, the dollar/rupee has consistently breached major ten-rupee thresholds every few years. It should stabilise within a 90–100 range over the coming years, provided the Fed does not initiate another aggressive rate hike cycle, they added.

  The government in recent days has already taken a step in the form of raising petrol and diesel prices, as well as hiking import duties on gold, to slow down demand for these major import-dependent items.

 What more could the RBI do to lift the rupee?

  A growing expectation is that the RBI will increase the repo rate (the benchmark rate at which it lends money to central banks) by at least 50-75 basis points by March 2026, from 5.25% currently.

  “If rates are not hiked, the currency will come under pressure, potentially leading to a vicious cycle. Moreover, if CPI inflation rises to 5.5% in the second half of the financial year, maintaining rates at 5.25% would be untenable,” Devang Shah, head of fixed income at Axis Mutual Fund, had told BT earlier this week.

  Rate hikes may not be the only steps that it may take.

  “Other potential measures include a special deposit scheme to attract non-resident inflows, withholding tax reduction on investments into debt, closer scrutiny of outbound FDI and foreign currency bond issuance by state names,” said Rao and Wee of DBS.

 How did India raise dollar deposits in the past?

  Potential measures like raising dollar deposits may not be the first time that the central bank has gone down that road.

  Back in 2013, when India was among the fragile five economies, and the rupee was sliding, amid expectations of the US Federal Reserve raising interest rates from the record low levels post the global financial crisis of 2008, the Reserve Bank allowed banks to mobilise dollar deposits of three-year maturity from non-resident Indians, which it would swap for rupee. These deposits helped bring in around $26 billion at the time.

  Much earlier in 1998, following the Asian financial crisis a year earlier, Resurgent India Bonds were issued to raise funds from NRIs and overseas corporate bodies. That helped raise around $4.2 billion.

  To boost forex reserves in 2000, India Millennium deposits were launched by the State Bank of India. This was a five-year, multi-billion-dollar foreign currency deposit scheme. Some $5.5 billion was reportedly mobilised through this scheme.  

  Market watchers feel that if the rupee continues to slip, this is one way that the central bank may explore.

  The RBI may also look at more currency swaps to further ease liquidity and stabilise the rupee, feel analysts.