RBI Considers Rate Action, Dollar Swaps As Rupee Pressure Mounts

The Reserve Bank of India (RBI) is weighing multiple options, including possible interest rate increases and additional dollar-rupee swap operations, as authorities attempt to stabilise the rupee following its recent slide against the U.S. dollar.

The domestic currency has remained under pressure in recent weeks due to higher global crude oil prices, sustained foreign portfolio outflows and a stronger U.S. dollar. The rupee recently crossed the ₹96-per-dollar mark and has weakened sharply since tensions escalated in West Asia earlier this year.

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The RBI’s next monetary policy meeting is scheduled for June 3 to June 5, where market participants will closely monitor any signals related to currency management and liquidity measures.

RBI Examining Multiple Measures

Along with potential policy rate action, the central bank is also evaluating liquidity management tools such as dollar-rupee swap arrangements and mobilisation of overseas funds through non-resident Indian deposits or sovereign-linked borrowing channels, as per reports.

Reuters had earlier reported that the RBI increased intervention in the foreign exchange market after the rupee touched record lows. The central bank has historically used dollar sales and swap operations to reduce excessive volatility in the currency market.

RBI Governor Sanjay Malhotra recently said the central bank does not target any fixed exchange rate level and intervenes only to curb disorderly market movements or speculative pressure.

Speaking in an interview with Mint, Malhotra said the rupee may no longer be overvalued after the recent depreciation. He added that the currency could now be considered undervalued in both nominal and real effective exchange rate terms.

Crude Oil, Capital Outflows Add Pressure

The rupee had already been weakening due to foreign investor selling before geopolitical tensions in West Asia intensified. The pressure accelerated further after crude oil prices surged following the conflict involving Iran.

A large amount of the country’s demand for crude oil is met via imports; hence, the currency tends to react negatively when international oil prices rise. This means that depreciation increases the costs of imports, and in addition, affects the economy by increasing inflation and subsidy costs.

Additionally, depreciation has an effect on the government budget as it makes debt servicing more expensive.

According to reports, the rupee declined more than 5% between March and May 21 amid elevated oil prices and continued capital outflows.

Focus On External Stability

The RBI has maintained that India’s external position remains manageable despite current pressures. Malhotra stated that the balance of payments situation was not yet a major concern, though it required close monitoring by the government and financial authorities.

The central bank chief also highlighted the need for long-term measures aimed at improving exports, increasing competitiveness and reducing dependence on imports.

Market participants are now awaiting the RBI’s June policy decision for further clarity on whether the central bank will rely mainly on intervention measures or consider broader monetary action to support currency stability.