India's rupee rallied approximately 1% on Monday, October 12, after the country's central bank introduced new measures to defend the currency, supplying US dollars directly to major oil companies and tightening foreign exchange trading rules.
The rupee closed at 95.77 per US dollar, strengthening from 96.73 on Friday in its largest single-day gain since April. Despite the recovery, the currency remains approximately 6.5% lower this year, having approached its record low of 96.96 reached in May.
Rising oil prices, higher global borrowing costs and foreign investment outflows have contributed to the decline, increasing pressure on India's currency despite earlier intervention by the Reserve Bank of India (RBI).
Under a special facility introduced on Saturday, October 10, the RBI will supply dollars from its foreign exchange reserves to three state-owned oil companies: Indian Oil, Hindustan Petroleum and Bharat Petroleum.
India imports most of its crude oil, which is generally priced in US dollars. The facility allows the companies to purchase dollars through designated banks rather than competing on the open foreign exchange market, reducing immediate pressure on the rupee.
The RBI has also tightened currency derivatives rules to discourage speculative trading and excessive demand for dollars.
The threshold for certain foreign exchange transactions without establishing underlying commercial exposure has been reduced from US$100 million to US$5 million. The central bank has also prohibited the rebooking of cancelled rupee-linked derivative contracts, although existing contracts may still be rolled over at maturity.
Additionally, banks must set aside cash equal to 20% of the value of qualifying foreign exchange derivatives contracts exceeding US$2 million, potentially increasing hedging costs for importers and other businesses.
Indian banks have already requested changes to the requirement, warning that it could restrict liquidity and increase costs for businesses seeking protection against currency fluctuations.
The measures follow the RBI's October 7 decision to raise its benchmark interest rate by 0.25 percentage points to 5.5%, its first increase since February 2023.
India's foreign exchange reserves have also declined, falling to US$734.6 billion by October 2, approximately US$51 billion below their September peak. Currency intervention and changes in asset valuations have contributed to the reduction.
Whether Monday's recovery marks the beginning of sustained stability remains uncertain. The RBI's intervention has eased immediate market pressure, but the currency's longer-term direction will depend on oil prices, international capital flows and the economic consequences of tighter trading restrictions.
