INR: RBI restricts trading as rupee reaches record low – DBS

India’s Strategy Amid Middle East Unrest and Rising Energy Costs

DBS Group Research economist Radhika Rao examines how India is managing ongoing instability in the Middle East and elevated energy prices, with a particular focus on the Rupee and domestic financial markets. The Reserve Bank of India (RBI) has updated its approach to foreign exchange management by restricting the Net Open Position in INR, leading to a brief appreciation of the Rupee before it slipped below 95 against the US dollar. Meanwhile, bond yields and overnight index swap rates have climbed due to fiscal and policy uncertainties.

RBI Implements Stricter Currency Market Controls

To reinforce its efforts to stabilize the Rupee, the RBI has introduced a new rule that limits Authorised Dealers’ Net Open Position in INR to $100 million per day in the local deliverable market, replacing the previous threshold of 25% of Tier 1 capital. This regulation, effective from April 10, is intended to discourage excessive speculation in the currency market.

The Rupee initially surged to the upper-93 range following the announcement, as market participants anticipated reduced arbitrage activity and a widening gap between offshore and onshore rates. However, this momentum was short-lived, and the Rupee soon dropped to a fresh low below 95/USD, as persistent high energy prices continued to threaten India’s external accounts and financial stability.

Onshore markets were closed on Tuesday for the fiscal year-end after a turbulent start to the week. The weakening Rupee, combined with the benchmark 10-year bond yield rising to 7%—a level not seen since mid-2024—was driven by concerns over fiscal pressures, steady issuance from state governments, and elevated global yields.

Overnight index swap rates also saw a significant increase, reflecting investor expectations of a more restrictive monetary policy. Looking ahead to FY27, despite the impact of nominal GDP growth (boosted by higher inflation), ongoing fiscal expenses and the possibility of increased fertiliser subsidies could slightly raise the projected full-year deficit.

(This article was produced with assistance from an AI tool and subsequently reviewed by an editor.)