Rupee Hits Historic Low, Highlighting the Limits of RBI Intervention Amid Oil Shock

Deteriorating trade conditions, continued outflow of foreign capital, and mounting pressure on the international balance of payments have jointly locked the rupee in a sustained depreciation channel, also exposing the deepening of India’s external vulnerability. The Reserve Bank of India previously introduced a series of measures aimed at curbing speculative positions in the foreign exchange market, which temporarily strengthened the rupee; however, all previous gains have now been wiped out. In recent months, the Reserve Bank of India has intensified dollar selling operations, tightened domestic market liquidity, and strengthened regulation of the offshore market: on March 27, the net open position limit for banks was tightened, and on April 1, trading of rupee-related non-deliverable forward contracts was banned. These initial measures triggered short covering and compressed forward premiums, temporarily stabilizing the rupee exchange rate by narrowing the arbitrage space between onshore and offshore markets. However, such interventions can only smooth exchange rate volatility and cannot reverse the overall depreciation trend. Although India’s total foreign exchange reserves appear ample, overall reserve levels have declined since the end of March, reflecting the rising costs of large-scale spot market interventions by the central bank.