As the rupee continues its slide, breaching the 95-level to the dollar for the first time, market experts and economists feel that the upcoming policy will need to deliver both protective measures for the currency and mechanisms to reverse the sustained flight of dollars, with over Rs 1.30 lakh crore ($14 billion) having exited Indian markets in the past one month.
In the last one year, FPIs overall sold Rs 1.69 lakh crore ($18.4 billion) worth of equity and debt investments.
With West Asia tensions refusing to die down and capital flows becoming increasingly erratic, markets expect policymakers to deploy a combination of market intervention, prudential tightening, and targeted steps to attract inflows and stabilise the rupee, thereby strengthening dollar buffers.
A former deputy governor of the Reserve Bank of India (RBI) said, “The central bank’s first line of defence must remain market-driven tools. The most efficient approach is the one that works with the market.” He said there has to be a calibrated buying and selling of foreign exchange to maintain liquidity. Such operations, he argued, help reduce volatility without distorting the normal market behaviour.
Fragile global backdrop
Given the fragile global backdrop, he said, the RBI must stay ahead of the curve. “The RBI should bulk up like every national central bank is doing,” he said, emphasising the need to continue building reserves when conditions permit.
A senior partner at a consulting firm said, “The RBI’s current role is like an emergency ward in a hospital, where interventions are tactical. But, the larger reality is that a bandage cannot fix a broken hand.” He believes sustained recovery will only come once the war subsides and capital flows return. For now, global investors are seeking safety, and India offers little incentive for them to stay. The weakening currency only compounds the pressure.
However, the former RBI deputy governor feels that if pressures worsen, the next set of tools could involve macro-prudential adjustments, including tweaks to banks’ net open position (NOP) limits. On Friday, the RBI directed authorised dealers to keep their NOP-INR positions within $100 million at the close of each business day.
He described this as a more balanced step than outright capital controls, which he said “limit the market, limit liquidity, limit turnover” and should be used only in extreme circumstances.
What do economists say?
Madan Sabnavis, chief economist at Bank of Baroda, said the pressure on the rupee is predominantly external. The RBI, he noted, sees the depreciation as largely imported, and aggressive dollar sales may not yield the desired stability. While the cap on forex positions aims to curb speculation, genuine importer demand, especially amid rising oil prices, will keep dollar needs elevated.
A special window for importers, he suggested, could be considered. “In this environment, you can’t compel companies to shift to rupee settlement. No country wants to settle in another’s currency,” Sabnavis said, adding that the global de-dollarisation narrative is unlikely to gain traction in the current climate.
If the crisis drags on, Gaura Sengupta, chief economist at IDFC First Bank, expects the RBI to prioritise preserving reserves. Potential measures include lowering hedging costs for external borrowings, creating a dedicated oil window for OMCs, and further liberalising FDI and ECB norms.
FCNR(B) deposit schemes may also return, though she termed them a last resort. She warned that by FY27, India could face renewed balance of payments pressures as the current account deficit widens and capital outflows persist.
The former RBI deputy governor, however, said India still has room to absorb stress. “We can tolerate a current account deficit of 3–3.5% of the GDP,” he said, noting that the present level is around 1% and that a portion of imports is re-exported at a higher value. Rolling back recent export taxes, he added, could help boost dollar earnings.
Kunal Sodhani, head of treasury at Shinhan Bank, said the RBI’s priority is managing volatility, and not defending any particular level. Tools such as sell-buy swaps, he said, can ease dollar tightness without excessively squeezing rupee liquidity. With intervention and tax outflows already draining liquidity from the banking system, the RBI may need to support markets through repo operations or bond purchases to prevent domestic rates from spiking.
Sodhani stressed the importance of fiscal discipline and clear communication. Maintaining control over the fiscal deficit, diversifying crude sourcing and signalling confidence in India’s external position would help anchor investor sentiment.