Will RBI’s Aggressive Move to Stop Rupee’s Slide Backfire? Experts Raise Concerns

The Reserve Bank of India’s latest attempt to halt the rupee’s sharp decline has delivered some quick results, with the currency rebounding more than 2% to 92.66 against the dollar. But the aggressive steps taken by the central bank have left many bankers, investors and economists worried that the cure might end up being worse than the disease. As the rupee touched fresh lows during the recent Iran conflict, the RBI ordered domestic banks to unwind their bearish positions in both the onshore and offshore currency markets. The sudden directive, issued without much prior explanation, caught the market off guard and created confusion among lenders and foreign investors.The rupee has indeed strengthened in the short term, but this recovery has come

at a cost. Banks could face losses running into hundreds of millions of dollars, according to estimates by Jefferies. Hedging has become significantly more expensive, making it harder for investors to protect their Indian exposures. Foreign investors have already started reducing their holdings in Indian bonds.Fears of Policy ReversalMany market participants fear that the RBI’s strong-handed approach could send the wrong signal — that India is stepping back from its long-standing efforts to integrate more deeply with global financial markets. After the painful “taper tantrum” of 2013, India had worked hard to liberalise its currency market, which eventually helped the rupee gain traction in centres like London and Singapore. The country’s inclusion in JPMorgan’s bond index in 2024 was seen as a major milestone in this journey.Sanjay Guglani, Chief Investment Officer at Singapore-based Silverdale Capital, which manages about $1.5 billion, described the RBI’s actions as “discretionary”. He warned that such moves raise the bar for rupee assets among offshore investors and could hurt long-term confidence. Economists at BofA Securities went a step further, saying the restrictions essentially “break the link” the RBI had carefully built over the last decade between onshore and offshore markets.What the RBI Did In late March, the central bank first capped banks’ daily currency positions in the domestic market at $100 million. When the rupee kept weakening, it extended the curbs to offshore derivatives, effectively stopping banks from offering non-deliverable forwards (NDFs) — instruments widely used by foreign investors to bet on the rupee’s movement.The goal was to reduce speculative short-selling and arbitrage trades that were putting extra pressure on the currency. However, these sudden changes have reduced liquidity and created a noticeable gap between onshore and offshore rupee rates.Lessons from Other CountriesSimilar interventions in the past by other emerging markets offer mixed results. China’s attempts to tighten offshore yuan liquidity between 2015 and 2017 stabilised the currency temporarily but created funding stresses and unsettled global investors. Malaysia’s 2016 restrictions on offshore ringgit trading also reduced speculation but hurt market liquidity and damaged its reputation.RBI Governor’s AssuranceRBI Governor Sanjay Malhotra tried to calm nerves on Wednesday, saying the measures are temporary and do not signal any change in the central bank’s long-term policy of developing currency markets and internationalising the rupee.Still, concerns remain. Soumya Kanti Ghosh, Chief Economic Adviser at State Bank of India, warned that the steps could create a “wedge” between offshore and onshore markets, potentially leading to a vicious cycle of higher offshore premiums. Rajeev De Mello, a global macro portfolio manager at Gama Asset Management, emphasised that foreign investors need a “reliable and predictable” framework. Any perception that rules can change suddenly makes India less attractive for long-term capital.The Bigger PictureThe Reserve Bank of India (RBI) has chosen to intervene in the currency market at this time due to many pressures affecting use of the rupee. Increased tariffs from the United States, high prices of oil due to problems in the Middle East, and the strength of the US dollar have all contributed to downward pressure on the value of the rupee. Being an oil-importing country with a large and continuing current account deficit makes India particularly sensitive to external shocks.At present, the value of the rupee appears to have levelled out. The larger issue is whether these short term strategies will deter the initial foreign investors that India must attract for India’s continuing to grow in the future. Various experts think that the RBI will need to clearly communicate how long these measures will be in place and be very quick to withdraw these measures; otherwise, India may experience a long-term decline in foreign investor confidence in the future.