RBI steps up action to support the rupee

India’s central bank has introduced a special facility to supply US dollars directly to three state-run oil-marketing companies as pressure on the rupee intensifies. From October 12, the Reserve Bank of India (RBI) will meet the daily dollar requirements of Indian Oil, Hindustan Petroleum and Bharat Petroleum through a dedicated window funded from its foreign exchange reserves.

By routing these firms’ needs away from the spot foreign exchange market, the RBI aims to reduce immediate dollar demand that has contributed to volatility in the rupee. The facility will remain in place until further notice, providing an open-ended backstop for these large importers.

The move comes as surging oil prices and higher global bond yields have weighed on India’s currency, which has fallen more than 7% this year and is hovering near record lows. Oil-importing companies are among the largest regular buyers of foreign currency, making them a focal point for efforts to stabilise the market.

Alongside the special dollar window, the RBI announced a package of regulatory changes aimed at rupee-involving derivative markets. Authorised dealers will be required to maintain a 20% “foreign exchange risk reserve” in cash with the RBI for eligible derivative contracts involving the rupee with a notional value above $2 million.

The threshold for certain foreign exchange derivative transactions that can be undertaken without establishing an underlying exposure has been lowered sharply to $5 million from $100 million. This change is designed to limit large uncovered derivative positions that can amplify one-way moves in the currency.

In addition, authorised dealers have been directed not to allow users to rebook any cancelled foreign exchange derivative contracts involving the rupee once the new directions are in force. The central bank stated that these steps seek to moderate potentially destabilising derivative demand and to improve the integrity of exposure verification processes.

Following the announcement of the measures, the rupee strengthened by roughly 0.6% in non-deliverable forward (NDF) trading in thin markets. The NDF market, which allows offshore participants to trade the rupee, is often used as a barometer of expectations for the currency.

The combined approach of supplying dollars directly to major oil importers and tightening rules on derivatives reflects an effort to manage both spot and synthetic demand for foreign currency. By addressing these channels, the RBI is attempting to contain short-term pressures on the rupee while preserving foreign exchange market stability.

The central bank has framed the changes as measures to discourage circumvention through repeated rebooking and to ensure that derivative activity is more closely tied to genuine underlying exposures. While underlying drivers such as oil prices and global yields remain influential, the new framework is intended to improve discipline and reduce the risk of destabilising flows in the rupee market.