RBI's Strongest Rupee Defence Since 2013: Dollar Window for Oil Refiners and a New Reserve on Forex Derivatives
The Reserve Bank of India (RBI) announced a new set of steps to support the rupee, as the currency again came close to its record low. Analysts describe them as among the strongest steps since the 2013 "taper tantrum" (a period when foreign money suddenly left emerging markets like India).
The RBI opened a special dollar window for state-owned oil refiners. This means these companies can get the dollars they need for oil imports from a special arrangement, instead of buying them in the open market, where their big daily demand pushes the rupee down.
For the first time, the RBI introduced a foreign-exchange risk reserve: banks must keep with the RBI, in rupees, an amount equal to 20% of the notional value (the face value) of each foreign-exchange derivative deal above $2 million. China's central bank uses a similar tool for the yuan.
The RBI also said that forward contracts, once cancelled, cannot be booked again, and it cut the limit for currency derivative deals done without proof of an underlying exposure (a real trade or loan that needs protection) from $100 million to $5 million.
These steps came days after the RBI raised interest rates and said it was open to more tightening. The rupee has fallen about 7% this year, the weakest in Asia, and closed just above its record low of 96.9650 per dollar. Analysts see 97 per dollar as the level the RBI wants to defend.
Pressure on the rupee comes from high oil prices, a war in the Middle East, and foreign fund outflows of over $30 billion from Indian shares this year. A diaspora deposit programme raised a record $133 billion and pushed reserves to nearly $800 billion in early September, but about $51 billion has since been used up over four weeks in defending the rupee.
Exchange Rate Management in India: RBI's Managed Float
India's exchange rate (how many rupees one US dollar costs) is mainly decided by the market, through the demand for and supply of dollars. The RBI does not fix the rate and has no official target level. But it steps in when the rupee moves too sharply, by selling or buying dollars and by changing rules. This system, where the market decides but the central bank smooths the ride, is called a managed float.
The new dollar window for oil refiners, the reserve on derivatives and the rate hike are all classic managed-float tools. The RBI is not fixing the rupee at 97, but it is making it costlier and harder for anyone to push it past that level quickly.
Foreign Exchange Reserves: Components, Adequacy and Use
Foreign exchange reserves are the dollars, other foreign currencies, gold and other safe international assets that the RBI keeps aside. They act like a country's emergency savings in foreign money. They are used to pay for imports in bad times and to calm the rupee when it falls too fast.
Every dollar the RBI sells to defend the rupee comes out of these reserves. The quick drop of $51 billion in four weeks shows why the RBI is now adding rule-based tools, like the derivatives reserve, instead of relying only on selling dollars.
Currency Hedging and the Forward Premium
Currency hedging means protecting yourself from a sudden change in the exchange rate. An importer who must pay dollars after three months can lock in the rate today through a forward contract. A forward contract usually costs a little more than today's rate; that extra cost is called the forward premium. It mainly reflects the gap between Indian and US interest rates.
The new curbs target the derivatives market, where a lot of the demand for dollars was building. The trade-off is that honest importers who hedge responsibly may now find hedging harder and costlier.
- Rupee record low: 96.9650 per dollar; analysts see 97 as the RBI's defence level
- Rupee fall in 2026 so far: about 7%, the worst in Asia
- Foreign fund outflows from Indian shares this year: over $30 billion
- Diaspora deposit programme: record $133 billion; reserves near $800 billion in early September 2026
- Reserves used in defending the rupee over the last four weeks: about $51 billion
- New FX risk reserve: 20% of notional value of each derivative deal above $2 million, kept with the RBI in rupees
- Limit for derivative deals without proof of underlying exposure: cut from $100 million to $5 million
- Cancelled forward contracts: cannot be rebooked
- Earlier steps: daily net open position for banks capped at $100 million
- Previous oil-company dollar window: August to December 2013
- Indian exchange rate market-determined since March 1993