The RBI's Battle for the Rupee: How India Is Defending Its Currency in 2025–2026

The short version

As of mid-June 2026, the rupee trades around 94.3–94.6 per US dollar — well off its record low of about 96.9 (May 20, 2026) but still down roughly 9% over 12 months. The Reserve Bank of India (RBI) is fighting an external storm (oil shock, foreign outflows, a strong dollar) it can slow but not reverse, and it has shifted from rigidly defending a level to managing the pace of decline.
The defense has been expensive: reserves fell from a record $728.5 billion (Feb 27, 2026) to about $681 billion in May before recovering past $700 billion in June; in FY26 the RBI net-sold a record $53 billion in spot and ran a forward “short dollar” book that peaked at $103 billion in March 2026. New Governor Sanjay Malhotra has explicitly allowed more flexibility than his predecessor Shaktikanta Das.
The reading that holds up: India’s reserves remain among the world’s largest (≈11 months of import cover), so a 1991-style crisis is not in prospect, but burning reserves cannot fix structural problems (oil dependence, weak capital inflows). Most banks see the rupee range-bound to modestly stronger (mid-80s to low-90s) by end-2026 if oil eases and the US trade deal holds — which argues for smoothing volatility, leaning on inflows (FCNR-B, bond-index flows), and not spending reserves to defend round numbers.

What stands out

The rupee is weak but not collapsing. It started 2025 around 85.6/$, broke 90 in early January 2026, and hit successive record lows through the spring 2026 oil shock, touching ≈96.9 on May 20, 2026. By mid-June 2026 it had recovered to ≈94.3–94.6 as oil fell on a US–Iran de-escalation. It was Asia’s worst-performing currency in both 2025 (down ~5.5%) and 2026.
Three external forces drive the weakness: a strong US dollar (high Fed rates), large foreign portfolio outflows (over $30 billion in 2026, exceeding all of 2025), and an oil/import shock from the 2026 Middle East conflict and Strait of Hormuz disruption. US tariffs added a layer in 2025 (50% peak) before a February 2026 trade deal cut them to 18%.
The RBI’s toolkit is multi-pronged: spot dollar sales, a large forward/NDF book, regulatory curbs on speculation (net-open-position caps, NDF limits), a revived FCNR(B) swap window, and tax/structural measures to attract inflows. It deliberately does NOT target a level — only curbs volatility.
The policy doctrine has shifted. Under Das (until Dec 2024) the rupee was one of Asia’s most tightly managed currencies; the IMF reclassified India to a “stabilised arrangement” in 2023 for over-intervening. Under Malhotra the RBI has allowed two-way flexibility, and in November 2025 the IMF reclassified the regime again — this time to a “crawl-like arrangement.”
History says defenses buy time, not trend reversal. The 2013 taper tantrum was tamed by Rajan’s FCNR(B) swap window (~$26 billion via FCNR alone, ~$34 billion with external borrowings); 2022’s Ukraine shock cost ~$56–70 billion in reserves but kept the fall orderly. In each case fundamentals, not intervention, ultimately set the level.
The expert debate is real and active. Critics (Arvind Panagariya, Raghuram Rajan) argue against burning reserves to defend a fundamental adjustment; defenders (RBI’s Poonam Gupta, others) argue volatility is genuinely harmful for an import-dependent economy. The truth is a calibrated middle: smooth, don’t fix.

The fuller picture

1. The current situation (2025–2026)

The rupee entered 2025 at about 85.64 per dollar and depreciated steadily, ending 2025 down roughly 5.5% — Asia’s worst-performing currency, on track for its largest annual decline since 2022. It breached the psychologically important 90 mark in early January 2026 (90.19 on January 2; it had touched a then-record 89.48 on November 21, 2025), then slid further. The 2026 average was around 92.8, with a low near 89.65 in early January and a sharp deterioration through the spring.

The decisive blow came from the 2026 Middle East conflict (“Iran war”) and the disruption of the Strait of Hormuz, through which roughly half of India’s crude transits. Brent crude surged above $110 a barrel; India imports close to 90% of its crude. The rupee hit a record low around 96.9 on May 20, 2026 (intraday ~96.95, close ~96.86). By mid-June 2026, as the US and Iran moved toward an interim deal to reopen Hormuz and crude fell back, the rupee recovered to roughly 94.3–94.6 per dollar (June 18–19, 2026) — a six-week high, up about 1.2–1.5% on the month but still down roughly 9% over 12 months.

Immediate pressures:

Dollar strength: The Fed held its benchmark at 3.5%–3.75% in June 2026 and signaled “higher for longer,” with US inflation around 3.5%, keeping the dollar bid and narrowing India’s carry advantage.
Capital outflows: Foreign portfolio investors pulled over $30 billion from Indian stocks and bonds in 2026 (exceeding the roughly $19 billion of 2025 outflows), partly as global capital chased AI/semiconductor-heavy markets such as Taiwan, South Korea, and the US.
Oil and the trade deficit: Every $10 rise in Brent adds roughly $14–15 billion to India’s annual import bill. FY26 merchandise trade deficit was around $333 billion (≈8% of GDP), offset substantially by a services surplus (~$214 billion). India’s balance of payments swung from a ~$14 billion surplus in FY25 to a ~$23.6 billion deficit in FY26.
US tariffs: In August 2025 the Trump administration imposed an extra 25% tariff (total 50%) on Indian goods over Russian oil purchases. On February 2, 2026, a bilateral deal cut the reciprocal tariff to 18% (removing the additional 25% punitive duty) after India agreed to wind down Russian crude purchases and move toward zero tariffs on US goods. This removed one headwind even as the oil shock created another.

2. How the RBI defends the rupee

Spot market intervention (selling dollars to prop up the rupee): The RBI sells US dollars from its reserves into the open market to meet excess dollar demand (from importers, exiting investors) and slow the rupee’s fall. In FY26 it net-sold a record $53.13 billion in spot, with sales peaking at $11.88 billion in October and $10.02 billion in December 2025. The catch: selling dollars drains rupee liquidity from the banking system, so the RBI “sterilises” — offsetting the liquidity hit with other operations to avoid spiking domestic interest rates.
Forward and NDF intervention (defending without immediately spending reserves): Rather than always burning spot reserves, the RBI sells dollars in forward and offshore non-deliverable forward (NDF) markets — dollar-settled contracts that let it influence the rupee without an immediate reserve hit. Its net short forward book hit a record $103.1 billion in March 2026, was $95.3 billion at end-April, and was trimmed to about $53 billion by early June as the RBI let contracts mature. Crucially, this forward book is effectively a future claim on reserves: as IDFC First Bank economist Gaura Sen Gupta noted (Business Standard, March 2025), “Forward dollar sales is just a delay and will ultimately be reflected in spot reserves,” and factoring it in cuts India’s import cover from about 10.7 months to 9.4 months.
Reserves (the war chest): Reserves peaked at $728.49 billion on February 27, 2026, fell to about $681 billion by late May (RBI dollar sales plus a fall in the value of gold holdings), and recovered above $700 billion by June. At ~$682–700 billion they cover roughly 11 months of imports — far above the 3-month safety threshold and among the strongest emerging-market positions. Economists estimate the RBI could deploy nearly $150 billion before headline import cover fell to 2013 stress levels (though the forward-book adjustment above tempers that comfort).
Regulatory/speculation curbs: On March 27, 2026 the RBI capped banks’ net open position in rupee (NOP-INR) at $100 million per day — the first explicit NOP limit since 2011 — forcing banks to unwind an estimated $40 billion of positions. On April 1 it barred banks from offering rupee NDF contracts to corporates (partly rolled back April 20) to stop arbitrage between onshore and offshore markets. It also asked state oil refiners to shift dollar buying away from the spot market.
Inflow measures (June 2026 package): Echoing 2013, the RBI on June 5–8, 2026 opened a special FCNR(B) swap window, fully subsidising banks’ hedging costs on fresh 3–5 year dollar deposits from NRIs (banks raised rates to as high as 7.10%, e.g., AU Small Finance Bank), exempted these deposits from CRR/SLR, offered a concessional swap for state-firm external borrowings, expanded foreign access to government bonds (15-, 30-, 40-year tenors under the Fully Accessible Route), and — via the government — removed capital-gains and interest taxes for foreign investors in G-secs (retrospective to April 1, 2026). MUFG estimated about $20 billion via the FCNR route alone given higher US rates, with the combined package (FCNR-B, ECB incentives, tax exemptions, and bond reforms) potentially drawing up to $40–50 billion.
Interest rate policy: Higher rates can support a currency by widening the yield gap with the US and attracting inflows. But the RBI’s Monetary Policy Committee held the repo rate at 5.25% (neutral stance) in both April and June 2026, prioritising growth and judging inflation contained. Governor Malhotra prefers a “wait and watch” approach; Deputy Governor Poonam Gupta argued against a “preemptive policy pivot.”
The doctrine (“no fixed target, only curb volatility”): The RBI repeatedly states it does not target a level or band, only smooths excessive, disorderly moves. As Malhotra put it, “We should not be looking at day-to-day volatility in rupee.”

3. The Malhotra shift

Shaktikanta Das (Governor until December 2024) ran one of Asia’s most tightly managed currencies, using reserves to crush volatility and deliver predictability. That earned the IMF’s 2023 “stabilised arrangement” label — a step away from “floating.” Per Reuters (December 2023), the IMF reclassified India’s de facto regime for the December 2022–October 2023 period, citing the rupee trading in “a very narrow range, suggesting intervention likely exceeded levels necessary to address disorderly market conditions.” India formally pushed back, calling the rationale “incorrect and inconsistent with reality.”

Sanjay Malhotra, who took office in December 2024, has signaled willingness to let the rupee move more in line with regional peers while still curbing excessive moves. Since Das’s departure the rupee depreciated sharply, and in November 2025 it plunged to a record low when the RBI “unexpectedly stepped back” from defending it as firmly as before — then rebounded when the RBI returned. In November 2025 the IMF formally reclassified India’s de facto regime to a “crawl-like arrangement” (technically meaning the rate stayed within a ~2% band around a trend for at least six months — i.e., not fully floating; distinct from a pre-announced “crawling peg” that earlier reports had loosely referenced). Markets read all this as a deliberate strategy: let the currency reprice to reduce imbalances rather than burning reserves to defend a round number.

4. What’s at stake

Import inflation: A weaker rupee raises the cost of oil, electronics, and gold. Fuel and even milk prices rose during the 2026 shock; wholesale price inflation accelerated. “A weak rupee silently acts like inflation for the common man,” as Enrich Money CEO Ponmudi R put it.
Corporate external debt: India’s external debt was around $765 billion at end-2025; outstanding commercial borrowings (ECBs) hit a record ~$291.6 billion at end-March 2025. Roughly 30% (rupee-cost or unhedged) is exposed to currency moves. A 5% rupee fall adds about ₹2,500 crore to a $500 million unhedged loan, squeezing firms without natural (export) hedges.
Common citizens: Costlier fuel, electronics, foreign travel, and education abroad. Families funding overseas study face large rupee-cost increases on dollar-priced tuition and living costs. A Congress MP called the fall “a salary cut without the employer even informing you.”
Exporters (the counterargument): A weaker rupee makes IT, pharma, textiles, and engineering more competitive and lifts rupee-denominated export and remittance earnings; with forward premiums falling (from ~4.5% to ~2.5%), many exporters cut hedge ratios to capture the favorable rate. But many exporters rely on imported inputs, so the net gain is muted, and import-cost inflation reaches households faster than export gains.
Investor confidence and reserves: A deep reserve pile reassures investors and rating agencies; a rapidly shrinking one can feed a confidence spiral. The cost of intervention is the opportunity cost of reserves plus liquidity drainage and forward-book complications.
Macro stability and inflation targeting: Rupee weakness passes through to inflation, constraining the RBI’s room to cut rates to support growth.

5. Historical precedents

2013 Taper Tantrum: When the Fed signaled tapering, the rupee fell ~15% (May–August 2013) and India was a “Fragile Five” economy. New Governor Raghuram Rajan launched a concessional FCNR(B) dollar-swap window (subsidised hedging at 3.5%). Per SPJIMR’s Prof. Ananth Narayan, the September 2013 swap windows “brought in $34 billion… with $26 billion raised through the FCNR route alone,” accounting for “12% of India’s forex reserves in 2013.” The rupee stabilised, reserves rebuilt, and the RBI unwound the swaps smoothly at maturity — a textbook success. The lesson: targeted inflow schemes work when the shock is temporary and fundamentals are sound.
2018: Currency pressure from a strong dollar and high oil; the RBI leaned on reserves and rate signals. Pressure eased as oil fell.
2022 (post-Ukraine): A dollar surge and oil spike triggered the largest reserve drawdown to that point — reserves fell from a peak of $642 billion (Sept 2021) to ~$572 billion (mid-July 2022), roughly a $70 billion fall (with ~$40–56 billion attributed to intervention plus valuation effects). The rupee still weakened ~6.7%, but less than peers. An RBI Bulletin article (August 2022) argued India met its intervention aims with progressively lower reserve drawdowns. Lesson: orderly management is achievable; the trend still follows fundamentals.
Earlier: Resurgent India Bonds (1998, ~$4.2 billion after Pokhran sanctions) and the India Millennium Deposits (2000, ~$5.5 billion) show India’s long playbook of tapping NRIs in crises.

The through-line: defenses succeed at preventing disorderly crashes and buying time, but they do not reverse a depreciation driven by fundamentals (oil, inflation differentials, capital flows). The $30+ billion spent in early 2026 slowed the fall but did not stop the rupee hitting record lows near 96.9.

6. The debate: should the RBI defend the rupee?

The “let it adjust” camp:

Arvind Panagariya (Chairman, 16th Finance Commission), on X, May 21, 2026, as the rupee hit 96.86: “Dear @RBI: Do not let the psychology of Rs 100 per dollar determine your policy response. 100 is just a number, like 99 and 101… Trying to defend the rupee will continue to bleed the reserves until they are exhausted.” He dismissed dollar bonds and high-interest NRI deposits as “largely a transfer to rich NRIs” and a “band-aid,” and argued that, unlike in 2013, low inflation means the economy “is well-positioned to absorb some inflationary pressure that will accompany the depreciation.”
Raghuram Rajan (former RBI Governor), interview with Mojo, January 15, 2025, after the rupee hit 86.59: “You don’t want to intervene ever against adjustments that are taking place because of fundamental economics. What you want to intervene against is volatility, which is short-term… The reality is the dollar has been strengthening against many currencies.” His framing: “it’s really a dollar issue,” nothing “to panic about.”
The IMF has historically nudged India toward a freer float, reclassifying the regime (2023 “stabilised arrangement”; 2025 “crawl-like arrangement”) as evidence of over-intervention. Commentators argue structural problems “cannot be resolved through intervention alone” — that the rupee “does not need a defender; it needs an economy worth defending.”

The “stability matters” camp:

RBI Deputy Governor Poonam Gupta argued that “excessive currency volatility was not necessarily desirable for countries like India.”
For a net importer, sharp swings feed inflation, disrupt corporate planning, and can trigger self-reinforcing capital flight. Reserves serve an insurance function against oil and capital-flow shocks; the Asian Financial Crisis taught emerging markets the dangers of pure market adjustment.
The choice is not a binary peg-vs-float; the relevant question is how intervention is designed.

The synthesis (and the RBI’s actual practice): smooth volatility, lean on inflows and structural fixes, and accept gradual depreciation in line with fundamentals rather than defending a number. A transparent, rules-based intervention framework (as in Chile, Brazil, Indonesia) is the constructive path.

7. Outlook and forecasts

Near term: Most forecasters expect the rupee to stay elevated but range-bound, with RBI intervention capping extreme volatility. A December 2025 Reuters poll of 37 analysts had a median around 88.9 by mid-2026 — overtaken by the spring oil shock. CareEdge expected ~87 by end-FY26; Bank of America saw ~86 and ING ~87 by end-2026, blaming weakness on global factors and expecting India to eventually win a lower tariff. DBS is more bearish (low-90s into 2027), while Westpac is notably bullish on the rupee (sub-80 by 2027–28) — the wide divergence underscores genuine uncertainty.
Key swing factors: the durability of the US–Iran/Hormuz de-escalation and oil prices; Fed policy; the pace of FPI flows; success of the June 2026 inflow package; and possible inclusion in global bond indices (e.g., Bloomberg Global Aggregate).
Risks: A renewed oil spike or faster outflows could push the rupee back toward 96–97+; some analysts flag the 100 mark. The maturing of the RBI’s forward book is an asymmetric risk that could pressure the rupee even as headline reserves look healthy.

What to watch

The pressure points that would change the read, and the thresholds that matter:

Smoothing vs. defending levels. The live question is whether the RBI keeps curbing disorderly volatility without spending reserves to defend psychological numbers (90, 95, 100). Burning reserves against a fundamental, oil-driven adjustment is, as Panagariya warns, a losing proposition. The threshold: if reserves fall below roughly $650 billion or import cover drops toward 8 months, expect intervention to scale back sharply.
Inflows over outright sales. The FCNR(B) swap window, bond-tax exemptions, and ECB incentives bring in dollars without depleting reserves. Whether the package delivers its projected $40–50 billion is the test; if inflows disappoint by Q3 FY27, the likelier path is deeper structural reforms (bond-index inclusion, easing FPI friction) rather than more spot sales.
The forward book. The measured unwinding of the (recently >$100 billion) short-dollar position into periods of rupee strength (as in June 2026) restores the credibility of headline reserves. The benchmark: a net forward short position low enough that forward-adjusted import cover stays comfortably above stress levels.
Rates. With inflation contained and growth the priority, the neutral 5.25% stance is defensible; rate hikes make sense only if rupee weakness becomes a genuine inflation threat, not to defend the currency per se.
The structural deficit. The durable fix is reducing oil-import dependence (energy diversification, renewables, strategic reserves), broadening the export base beyond IT/services, and deepening domestic financial markets — none of which reserves can buy.
Households and firms. Two-way volatility cuts both ways: unhedged dollar exposure is a live risk, exporters’ gains are real but muted by imported inputs, and the long-run trend has averaged roughly 3.5–4.5% annual depreciation over the past two decades.

Caveats

Fast-moving data. Exchange rates, reserves, and the forward book change weekly. Figures here are dated where possible (rupee ≈94.3–94.6 mid-June 2026; reserves ≈$681–700+ billion; forward book trimmed to ~$53 billion by early June 2026). Treat all as point-in-time.
Source quality varies. The strongest figures come from RBI data (via Business Standard, Bloomberg, Reuters), the IMF, and bank research (MUFG, ICRA). Some exchange-rate and forecast figures come from currency-converter and brokerage/marketing sites, which can be promotional or model-driven — these are treated as indicative, not authoritative.
Forecasts are not facts. Year-end and multi-year targets (e.g., 86–87 by end-2026) are projections that diverge widely (DBS bearish, Westpac bullish on the rupee) and have repeatedly been overtaken by events (the 2026 oil shock blew past late-2025 forecasts). Treat all forward-looking numbers as conditional scenarios, not predictions.
The geopolitical wildcard. The single biggest variable is the Middle East/Hormuz situation and oil. A durable peace points to a stronger rupee; renewed conflict points to fresh record lows. Much of the mid-June 2026 recovery hinges on an interim US–Iran deal that may not hold.