Reserve Bank of India Spends $90 Billion to Defend Rupee Amid Escalating Currency Pressures

The Reserve Bank of India has deployed approximately $90 billion since June to defend the rupee against mounting depreciation pressures. The central bank utilized spot market sales and currency swaps to absorb surplus liquidity, drawing heavily from the $140 billion raised earlier this year through diaspora-linked deposits.[2][8]

This aggressive intervention comes as the Indian currency faces intense strain from elevated global oil prices and sustained foreign equity outflows. The rupee has fallen by 5 percent against the US dollar in 2026, forcing policymakers to prioritize exchange rate stability over accumulating a larger foreign exchange buffer.[2][3]

India’s foreign exchange reserves reflect the scale of this defense, dropping by nearly $60 billion over six weeks. After reaching a record high of $785.71 billion on September 4, the reserves fell to $726.03 billion by October 9, marking a rapid depletion of the country's financial war chest.[5][7]

Foreign currency assets, the largest component of the reserves, accounted for the bulk of the decline. During the week ending October 9 alone, these assets fell by $7.14 billion to $597.61 billion, while gold reserves also saw a reduction of $1.32 billion.[5]

Mechanics of the Currency Defense

To execute this defense, the central bank has relied heavily on the Foreign Currency Non-Resident Bank deposit scheme launched in June. The program successfully mobilized massive foreign capital, but the institution assumed the depreciation risk while paying unusually high interest rates to attract those funds.[4]

Economists estimate that the institution has already spent about half of the net diaspora inflows to stabilize the currency market. The rapid drawdown highlights a determination to prevent the rupee from breaching the psychological threshold of 97 per dollar, a level that could trigger broader financial instability.[3][4]

Beyond direct market intervention, regulators have introduced extraordinary measures to curb volatility. On October 10, the central bank established a special dollar window specifically for public sector oil marketing companies, allowing them to meet their massive foreign exchange demands outside the spot market.[2][4]

The central bank also tightened rules around foreign exchange derivatives to discourage speculative trading. Dealers are now mandated to maintain a 20 percent foreign exchange risk reserve on forward contracts, a move designed to make hedging significantly more expensive and reduce downward pressure on the rupee.[2][4]

External Pressures and Market Reaction

The primary catalyst for the currency's weakness is the surging cost of crude oil, driven by the escalating conflict in Iran. As one of the world's largest energy importers, India faces a widening merchandise trade deficit, which expanded to $30.21 billion in September from $26.8 billion in August.[2][3]

Foreign investor behavior has compounded the structural trade imbalance. Record foreign selling of Indian equities has accelerated capital flight, while rising US Treasury yields have made emerging market assets less attractive, forcing the central bank to step in as the primary supplier of dollars.[2][3]

The central bank's actions have yielded some near-term stability, helping the rupee snap an eight-day losing streak. The currency strengthened by 0.7 percent over the past week, trading at approximately 94.81 to the dollar by Thursday, supported in part by foreign inflows targeting upcoming public offerings.[1][2]

However, market participants warn that frequent regulatory shifts risk undermining policy predictability. Traders and economists note that while the extraordinary measures have bolstered the currency, they also fragment market liquidity and create uncertainty for institutional investors managing cross-border portfolios.[3]

The Limits of Intervention

The sheer pace of the reserve depletion has raised questions about the sustainability of the current strategy. Half of the reserves built up between June and August have been spent in a fraction of that time, prompting concerns that the central bank cannot maintain this level of market support indefinitely.[4]

At the end of August, net forward dollar liabilities had already climbed to $200 billion, up from $137 billion in July. This growing forward book indicates that the institution is pushing some of its dollar obligations into the future, a strategy that could limit its flexibility if external pressures persist.[3][8]

Analysts at Ambit brokerage highlighted that the sharp fall in usable reserves, once adjusted for forward shorts and gold, has reached noticeable levels. A continued decline could fuel further speculation against the rupee, testing the capacity to defend the currency without resorting to broader macroeconomic tightening.[3]

The monetary policy committee recently raised policy rates by 0.25 percentage points to 5.5 percent, responding to September inflation that neared its 6 percent tolerance limit. This rate hike serves as a secondary defense mechanism, aiming to attract capital and anchor domestic prices amid the currency depreciation.[8]

Ultimately, the success of the currency defense will depend on global energy markets and the trajectory of US interest rates. Until those external headwinds subside, policymakers face a delicate balancing act between preserving foreign exchange buffers and preventing a disorderly decline in the rupee.[2][3][4]

The scale of the intervention also reflects a broader shift in how emerging markets are navigating the current geopolitical environment. By utilizing diaspora funds rather than relying solely on traditional reserves, the country has demonstrated a willingness to employ unconventional tools to insulate its domestic economy from global shocks.[2][8]

Moving forward, market watchers will closely monitor weekly statistical supplements for signs of stabilization. If the reserve drawdown continues at its current pace, policymakers may be forced to consider more aggressive capital controls or allow the rupee to find a new, lower equilibrium against the dollar.[3][4]