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The Indian rupee dropped to a new record low on Monday, reversing its initial gains, as the basic factors remained unfavorable for the currency. The rupee fell below the 95 per dollar level for the first time, reaching 95.20 per dollar, which is a decrease of 0.3% for the day. It started the day over 1% higher after the Reserve Bank of India (RBI) decided to tighten regulations on banks' foreign exchange positions, but this relief was short-lived. Up to Friday in March, the domestic currency has fallen more than 4%, indicating it is on track for its worst month in seven years. A report from Reuters indicated that the RBI's recent move to set new limits on banks' onshore positions late Friday led banks to sell off dollar holdings in the domestic market while also increasing their positions in the non-deliverable forward (NDF) market. Due to the substantial exposure, estimated between $25 billion and $35 billion, this change caused the onshore dollar/rupee rate to trade significantly lower than the NDF rate.
Businesses took advantage of the price difference by purchasing dollars in the onshore market and selling them in the NDF market, which limited the rupee's gains and caused price fluctuations across various markets. Concurrently, strong demand from large companies to hedge against upcoming liabilities put additional pressure on the rupee, making it lose its early gains. The rupee initially rose by more than 1% to reach 93.60 at the start. Experts believe the RBI's action comes at a time of high stress for the rupee. They suggested that after the initial rise, the currency would be influenced by basic factors like oil prices, foreign portfolio investment (FPI) flows, and the strength of the US dollar. Such geopolitical shocks usually lead to a typical risk-averse response—increasing oil prices, strengthening the US dollar, and weakening currencies in emerging markets like the INR.
"From the RBI’s perspective, the main focus is to manage volatility rather than defending a specific rate. Ongoing careful intervention in the foreign exchange market, both in spot and forward trades, can help stabilize disorderly changes. The RBI might also use strategies like sell-buy swaps to manage dollar liquidity without too much impact on rupee liquidity. Given the recent tightening of banking liquidity due to foreign exchange interventions and tax payments, providing liquidity through variable rate reverse repos or open market operations is vital to ensure domestic rates do not surge and hinder growth," stated Kunal Sodhani, Head of Treasury at Shinhan Bank. The rupee crossing 95 is the result of several forces building over months—Brent crude oil prices above $105, FPI outflows surpassing $11 billion in March, and an expanding current account deficit. Looking ahead, Anindya Banerjee, Head of Commodity and Currency Research at Kotak Securities, mentioned that for the rupee to reach and surpass 100, crude oil prices would have to be significantly over $200 a barrel. However, before those levels are met, there will need to be a significant decline in demand. Banerjee added that he anticipates the RBI will actively intervene, with strong measures likely if the USD/INR goes above the 95-96 range.
He went on to say that India is in a better position than many other countries—good diplomacy has helped us find new supply routes and maintain healthy stock levels, which protects us from a shortage. The main issue is the sudden increase in prices, which is something that one country cannot control. “After the situation improves, energy costs could drop quickly, and the rupee—supported by India’s solid economic fundamentals—might bounce back just as swiftly,” he mentioned. At the same time, Naveen Mathur, Director of Commodities & Currencies at Anand Rathi Share and Stock Brokers, stated that reaching 100 per dollar would need a significant crisis event like crude oil prices staying over $130, a sharp exit of investments, and limited support from the RBI, which is unlikely but still possible.
“The rupee is expected to be very unstable in the short term, showing a clear trend of losing value due to the rising tensions between the US and Iran. Brent crude prices remaining above $110-115 per barrel and ongoing foreign portfolio investment outflows (this month: ₹1,11,377 crore, the highest in 17 months) are already pushing the USD/INR close to the 94–95 range,” Mathur explained. Mathur added that RBI actions and stricter regulations should limit the extreme decline, keeping the trading range between 92–96 in the near future. However, if the conflict continues for a long time, causing an oil crisis and a growing current account deficit, the rupee might reach 97–98, he suggested.
