The rupee fell on account of several factors, which include a natural market adjustment | Photo Credit: desifoto

The rupee’s sharp slide against the dollar since the beginning of the West Asia war, which had taken it beyond the 95-mark against the dollar in March, necessitated a calibrated policy response. The Indian unit was already the worst performing Asian currency in 2025, with a depreciation of over 8 per cent over the past 12 months. A recent report in this newspaper points out that the real effective exchange rate was at its lowest level in 12 years this February.

The rupee fell on account of several factors, which include a natural market adjustment. Apprehensions over the trade deal as well as the actual tariff impact on imports played a role. The more recent causes include the current spurt in crude oil prices; persistent portfolio outflows and speculative activity by banks. The last needed to be checked. The RBI cracked down on speculative activity last fortnight, limiting the net open positions in rupee derivatives held by banks in the onshore market to just $100 million. Banks were buying dollars at a lower rate in India and selling them at a higher rate in non-deliverable forwards market in offshore centres such as Dubai and Singapore. These trades added to downward pressure on the rupee. The RBI’s crackdown helped the rupee recover smartly in the last two weeks though it was back under pressure on Monday, largely due to fundamental reasons . Importantly, the RBI move sent a strong signal to the market that the central bank was willing to act, when required. With the restrictions set to continue until the crisis blows over, domestic banks can be expected to reduce their speculative trades in the rupee.

The RBI must reverse the directive once the currency stabilises, as playing with the market is never a good idea. Besides, such measures offer only a temporary reprieve. The RBI had acted similarly in December 2011, when too the currency was under pressure. While the rupee strengthened in the weeks following the move, it was 4 per cent lower a year later. With the supply shock and vaulting prices of crude oil and gas expected to expand the current account deficit, the rupee will naturally come under further pressure. Foreign portfolio investors have continued to be bearish about India, pulling $3.05 billion out of equities in April so far. Their net sales in 2026 are $18.8 billion.

Bond arbitrage may continue, as US yields remain firm. The RBI will have to continue with its long-established policy of only managing excessive volatility in the rupee, without targeting a level. While forex reserves are comfortable at $697 billion, they were down 4 per cent in March due to market interventions. However, if the volatility continues, the central bank will have to perforce look at other measures that it can unleash to support the currency .

Published on April 13, 2026