As the Indian rupee (INR) broke the psychological mark of 90, there have been concerns about the Reserve Bank of India’s inconsistency in its foreign exchange interventions, arguing that the central bank allowed the rupee to weaken sharply when other global currencies were also under pressure, only to step in later with mild interventions.
This has created apprehension that the RBI’s timing is reactive rather than strategic, particularly as the speed of depreciation from 88+ to 90 in just a week has unsettled the market, including banks and traders, despite the overall annual depreciation of 5% being within historical averages.
What did Kunal Sodhani say?
“The key factor behind this perception is the shift in intervention philosophy between the current and former RBI Governor,” said Kunal Sodhani, Head of Treasury at Shinhan Bank. He stated that the previous Governor focused more on daily interventions to keep the USD/INR within a very narrow band, sometimes as tight as 10 paise or less, thereby ensuring predictability and stability and highlighting to FPIs that we have a stable currency.
In contrast, the current Governor believes in allowing market forces of demand and supply to largely determine the exchange rate, intervening only in cases of excessive volatility or unforeseen risks.
This approach has been evident in sharp, targeted interventions around the 87.69 and 88.80 levels in October, when volatility threatened to spiral. The rupee, which was at 88.79 on October 13, surged to 87.60 as of October 16. The difference in styles reflects a broader philosophy, the rupee should find its equilibrium naturally, with the RBI acting as a stabiliser rather than a constant participant.
Diving deep in the dilemma
However, the RBI’s current dilemma in defending the rupee at the 90-mark stems from multiple intertwined factors. The central bank holds a net short forward book of $63 billion as of October 31, up from $53 billion as of August 31, which complicates aggressive intervention since covering this position would accelerate depreciation, while expanding it could attract speculators.
Dealers say that the RBI may be using exchange-based interventions, which reduce the direct impact on reserves but are less liquid, thereby diminishing effectiveness. At the same time, monetary policy considerations weigh heavily. With GDP growth at 8.2% and inflation at just 0.25%, markets anticipate rate cuts.
Lower interest rates would reduce yields, potentially triggering capital outflows and further pressuring the rupee. The RBI may therefore be waiting for the upcoming policy announcement before committing to costly interventions, ensuring its moves are aligned with broader monetary objectives.
Another aspect of the strategy is the RBI’s effort to encourage natural sellers. By allowing depreciation and higher forward premiums, the central bank incentivises exporters and carry traders to sell dollars, thereby bringing more natural sellers into the market and reducing the need for heavy-handed intervention.
Indicators of stress, such as overnight costs rising from 0.40% to 0.56% and one-year forward premiums climbing from 2.21% to 2.49–2.50% from November 27 to December 3, 2025, point to a growing dollar shortage in the system.
Bankers and dealers believe RBI is preserving its firepower for genuine volatility rather than defending psychological thresholds. It could be post the MPC on December 5 and the Fed meeting which is slated for December 10.
