RBI Weighs Policy Steps as Rupee Hits Record Low Against Dollar

The Reserve Bank of India is evaluating several options to stabilise the rupee, including a potential rate hike, following the currency’s sharp depreciation against the U.S. dollar, according to a Bloomberg report citing people familiar with the matter.

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Senior RBI officials, including Governor Sanjay Malhotra, have reportedly held internal discussions in recent days to assess policy responses after the rupee touched fresh record lows in the foreign exchange market.

The Indian currency weakened to an all-time low of 96.95 against the U.S. dollar during trading on May 20 before settling at a record closing low of 96.86. Persistent demand for dollars, elevated global crude oil prices and strength in the dollar index continued to pressure the rupee.

Rupee Recovers in Early Trade

The rupee recovered partially in early trade on May 21 after U.S. President Donald Trump indicated that negotiations with Iran were nearing the final stage, easing concerns around a further escalation in West Asia.

At the interbank foreign exchange market, the rupee opened at 96.25 against the U.S. dollar and later strengthened to 96.45 during early trading hours. The recovery marked a gain of 41 paise from the previous session’s closing level.

Forex market participants, however, continued to monitor geopolitical developments and crude oil price movements closely, as volatility in energy markets remains a major concern for emerging market currencies, including the rupee.

Pressure From Oil Prices and Dollar Strength

Crude oil prices have soared in recent weeks over tensions in West Asia, continuing to put pressure on the rupee. India imports nearly 90% of its crude oil requirement, making the domestic currency sensitive to sharp movements in global energy prices.

A stronger U.S. dollar and rising U.S. Treasury yields have also weighed on emerging market currencies globally. The dollar index has remained firm as investors reassessed expectations around future rate cuts by the U.S. Federal Reserve.

The RBI has already been active in the currency market through dollar sales aimed at limiting volatility in the rupee. Reuters reported earlier that the central bank had been selling dollars regularly in recent sessions to contain excessive weakness in the currency.

Markets Watch RBI’s Next Move

A potential rate increase by the RBI could help support the rupee by improving interest rate differentials and attracting foreign capital flows. Nevertheless, higher interest rates could also have an impact on economic growth and liquidity.

The Reserve Bank of India had declared a $5 billion dollar rupee buy/sell swap auction slated for May 26 to cater to liquidity problems due to foreign exchange interventions.

Market players would now look forward to watching out for the forthcoming remarks by the RBI due to the various tradeoffs involved amidst the uncertain environment.