What is the story about?
The Indian rupee slid past the 95-per-dollar mark for the first time on Monday, hitting a record low of 95.14 against the US dollar, as early gains fizzled out amid corporate arbitrage trades and sustained importer demand.
The currency had opened sharply higher at 93.60 per dollar, rising over 1%, but failed to hold ground through the session.
Traders pointed to a mix of regulatory shifts and opportunistic positioning that reversed the initial momentum.
The latest bout of volatility follows the Reserve Bank of India’s move to tighten banks’ foreign exchange positions. The directive forced lenders to unwind onshore dollar holdings while building positions in the non-deliverable forward (NDF) market, creating a divergence between domestic and offshore pricing.
This gap triggered arbitrage opportunities that corporates were quick to tap—buying dollars onshore and selling them in the NDF market. The flows capped the rupee’s upside and led to uneven price action across segments.
Market estimates suggest repositioning flows in the range of $25 billion to $35 billion. The one-month NDF-onshore spread, which typically stays within 1–5 paise, widened to over ₹1 at one point before easing to around 40–50 paise—still elevated and attractive for arbitrage trades.
Alongside this, steady dollar demand from importers—particularly large corporates hedging near-term liabilities—added to the pressure, dragging the rupee lower through the day.
Policy signal, not pivot
According to Madhavi Arora, Chief Economist, Emkay Global, the central bank’s move appears more signalling-driven than a fundamental shift in currency management.
“The aim of the circular is likely to convey that the RBI is closely monitoring markets, rather than to materially impact currency levels,” she said, adding that this helps explain why the rupee did not sustain its early gains.
She noted that the step is aimed at discouraging speculative positioning and excessive arbitrage activity, especially in an environment of relatively low overnight domestic rates.
Arora also indicated that the broader direction of the rupee remains unchanged. “The policy intent is not to alter the fundamental trajectory of the INR, which continues to face pressure from adverse terms of trade and a ‘capital account drought’, but to prevent speculative bets—both onshore and offshore—from amplifying the move,” she said.
Macro context remains stable, says government
Finance Minister Nirmala Sitharaman maintained that India’s economic fundamentals remain strong, stressing that the rupee’s movement must be viewed in a global context.
She pointed out that several Asian currencies have weakened more sharply against the US dollar in recent weeks, particularly following geopolitical tensions such as the ongoing West Asia conflict.
Government officials reiterated that the rupee is market-determined and influenced by a range of factors, including global dollar strength, capital flows, and trade dynamics, while authorities continue to keep a close watch on developments.
The currency had opened sharply higher at 93.60 per dollar, rising over 1%, but failed to hold ground through the session.
Traders pointed to a mix of regulatory shifts and opportunistic positioning that reversed the initial momentum.
The latest bout of volatility follows the Reserve Bank of India’s move to tighten banks’ foreign exchange positions. The directive forced lenders to unwind onshore dollar holdings while building positions in the non-deliverable forward (NDF) market, creating a divergence between domestic and offshore pricing.
This gap triggered arbitrage opportunities that corporates were quick to tap—buying dollars onshore and selling them in the NDF market. The flows capped the rupee’s upside and led to uneven price action across segments.
Market estimates suggest repositioning flows in the range of $25 billion to $35 billion. The one-month NDF-onshore spread, which typically stays within 1–5 paise, widened to over ₹1 at one point before easing to around 40–50 paise—still elevated and attractive for arbitrage trades.
Alongside this, steady dollar demand from importers—particularly large corporates hedging near-term liabilities—added to the pressure, dragging the rupee lower through the day.
Policy signal, not pivot
According to Madhavi Arora, Chief Economist, Emkay Global, the central bank’s move appears more signalling-driven than a fundamental shift in currency management.
“The aim of the circular is likely to convey that the RBI is closely monitoring markets, rather than to materially impact currency levels,” she said, adding that this helps explain why the rupee did not sustain its early gains.
She noted that the step is aimed at discouraging speculative positioning and excessive arbitrage activity, especially in an environment of relatively low overnight domestic rates.
Arora also indicated that the broader direction of the rupee remains unchanged. “The policy intent is not to alter the fundamental trajectory of the INR, which continues to face pressure from adverse terms of trade and a ‘capital account drought’, but to prevent speculative bets—both onshore and offshore—from amplifying the move,” she said.
Macro context remains stable, says government
Finance Minister Nirmala Sitharaman maintained that India’s economic fundamentals remain strong, stressing that the rupee’s movement must be viewed in a global context.
She pointed out that several Asian currencies have weakened more sharply against the US dollar in recent weeks, particularly following geopolitical tensions such as the ongoing West Asia conflict.
Government officials reiterated that the rupee is market-determined and influenced by a range of factors, including global dollar strength, capital flows, and trade dynamics, while authorities continue to keep a close watch on developments.
