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India’s central bank is stepping up efforts to stabilise the rupee and government bond market as global crude oil prices surge above $100 a barrel, raising concerns about inflation, the trade deficit and pressure on public finances.
The Reserve Bank of India (RBI) has intensified interventions in both domestic and offshore currency markets to support the rupee, which recently slipped to a record low beyond 92 against the US dollar. At the same time, the central bank has announced plans to purchase Rs 1 trillion (about $10.9 billion) worth of government bonds through open market operations this month, adding to recent market purchases.
Economists say the twin moves reflect the growing strain that rising oil prices are placing on India’s economy. As one of the world’s largest crude importers, India is particularly vulnerable to higher energy costs, which can push up inflation, widen the current account deficit and weaken the currency.
By intervening in foreign exchange markets and buying bonds, the RBI is trying to stabilise the rupee, inject liquidity into the banking system and prevent government borrowing costs from rising sharply.
“The balance of payments may come under immense pressure if the West Asia crisis sustains beyond the near term,” Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, told Bloomberg News. She added that the RBI may need to step up currency intervetions and could increase bond purchases beyond a base case estimate of 4 trillion rupees if the pressure continues.
According to Bhardwaj, the RBI likely sold between $18 billion and $20 billion in foreign exchange markets last week to support the rupee, with much of the activity taking place offshore. The central bank has also been using buy-sell swap operations to inject liquidity into the financial system.
India still has a strong buffer to manage currency volatility, with foreign exchange reserves standing at a record $728.5 billion at the end of February.
Despite these efforts, the rupee remains under pressure amid geopolitical tensions and elevated oil prices. Economists at Barclays, including Mitul Kotecha, told Bloomberg News the currency could remain weak if crude prices stay high.
Oil prices recently crossed the $100-per-barrel mark for the first time since 2022 as the conflict involving Iran, Israel and the United States in West Asia continues, raising fears of disruptions to global energy supplies.
The surge complicates the economic outlook for India. Earlier this year, RBI Governor Sanjay Malhotra described India’s economy as being in a “rare Goldilocks period”, supported by low inflation and strong growth. However, the central bank had earlier assumed crude prices at around $70 a barrel and warned that a 10 per cent increase from that level could push inflation up by about 30 basis points while trimming economic growth by roughly 15 basis points.
Some analysts, however, believe the RBI may not aggressively defend the rupee because of uncertainty over how long geopolitical tensions and high oil prices will persist.
“The RBI is likely to be more tolerant of rupee weakness given limited visibility on the timing of the conflict’s end and oil prices above $100,” Anubhuti Sahay, head of India economic research at Standard Chartered, told Bloomberg News. She added that the central bank will need to use its foreign exchange reserves carefully if interventions continue.
At the same time, the RBI’s bond purchases are expected to help replenish liquidity drained by its currency market operations and keep government bond yields under control. Benchmark yields have already risen by more than 10 basis points this year and are approaching levels last seen in early 2025 despite earlier rate cuts and liquidity injections.
The Reserve Bank of India (RBI) has intensified interventions in both domestic and offshore currency markets to support the rupee, which recently slipped to a record low beyond 92 against the US dollar. At the same time, the central bank has announced plans to purchase Rs 1 trillion (about $10.9 billion) worth of government bonds through open market operations this month, adding to recent market purchases.
Economists say the twin moves reflect the growing strain that rising oil prices are placing on India’s economy. As one of the world’s largest crude importers, India is particularly vulnerable to higher energy costs, which can push up inflation, widen the current account deficit and weaken the currency.
By intervening in foreign exchange markets and buying bonds, the RBI is trying to stabilise the rupee, inject liquidity into the banking system and prevent government borrowing costs from rising sharply.
“The balance of payments may come under immense pressure if the West Asia crisis sustains beyond the near term,” Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, told Bloomberg News. She added that the RBI may need to step up currency intervetions and could increase bond purchases beyond a base case estimate of 4 trillion rupees if the pressure continues.
According to Bhardwaj, the RBI likely sold between $18 billion and $20 billion in foreign exchange markets last week to support the rupee, with much of the activity taking place offshore. The central bank has also been using buy-sell swap operations to inject liquidity into the financial system.
India still has a strong buffer to manage currency volatility, with foreign exchange reserves standing at a record $728.5 billion at the end of February.
Despite these efforts, the rupee remains under pressure amid geopolitical tensions and elevated oil prices. Economists at Barclays, including Mitul Kotecha, told Bloomberg News the currency could remain weak if crude prices stay high.
Oil prices recently crossed the $100-per-barrel mark for the first time since 2022 as the conflict involving Iran, Israel and the United States in West Asia continues, raising fears of disruptions to global energy supplies.
The surge complicates the economic outlook for India. Earlier this year, RBI Governor Sanjay Malhotra described India’s economy as being in a “rare Goldilocks period”, supported by low inflation and strong growth. However, the central bank had earlier assumed crude prices at around $70 a barrel and warned that a 10 per cent increase from that level could push inflation up by about 30 basis points while trimming economic growth by roughly 15 basis points.
Some analysts, however, believe the RBI may not aggressively defend the rupee because of uncertainty over how long geopolitical tensions and high oil prices will persist.
“The RBI is likely to be more tolerant of rupee weakness given limited visibility on the timing of the conflict’s end and oil prices above $100,” Anubhuti Sahay, head of India economic research at Standard Chartered, told Bloomberg News. She added that the central bank will need to use its foreign exchange reserves carefully if interventions continue.
At the same time, the RBI’s bond purchases are expected to help replenish liquidity drained by its currency market operations and keep government bond yields under control. Benchmark yields have already risen by more than 10 basis points this year and are approaching levels last seen in early 2025 despite earlier rate cuts and liquidity injections.
