King Canute and the sea waves – Business Standard

Now imagine the Reserve Bank of India (RBI) as King Canute and the currency market as the sea.

Early last week, less than a week after the October monetary policy announcement, RBI Governor Sanjay Malhotra told Moneycontrol that the central bank would deploy whatever tools necessary to ensure orderly movement in the forex market.

On the same day, delivering remarks at the Bloomberg New Economy Forum in New Delhi, Finance Minister Nirmala Sitharaman emphasized that the central bank’s primary focus was to maintain stable market conditions rather than defend a specific exchange rate. Her position followed closely after the RBI unveiled another suite of measures aimed at calming the currency market.

During his post‑October 7 media interaction, Malhotra observed that according to several assessments—including those based on the REER—the rupee may even be undervalued. He also highlighted the RBI’s recent initiatives to drain dollar liquidity from the market.

What concrete steps has the RBI undertaken so far to secure orderly market dynamics and mitigate rupee depreciation? To provide context, here is a brief overview of historical rupee volatility and the interventions taken:

In 1997-98, during the East Asian financial crisis, the rupee depreciated roughly 10-12 per cent, sliding from 35.7 a dollar in mid-1997 to 39-40 by early 1998. India’s foreign exchange reserves were a modest $26-29 billion at that time.

The RBI tightened monetary policy by raising the rate and cash reserve ratio (CRR). Subsequently, it raised at least $4.23 billion through Resurgent India Bonds in August 1998 to shore up reserve buffers following the US post-Pokhran sanctions, and another $5.5 billion through India Millennium Deposits in October-November 2000 to counter capital flight during the global tech stock crash.

In 2008‑2009, the rupee dropped 25-30 per cent, from 39-40 a dollar in early 2008 to 51-52 by early 2009 during the global financial crisis. Forex reserves dropped from a peak of $316 billion to $250 billion due to heavy market interventions and capital flight by foreign institutional investors (FIIs).

Besides aggressive dollar-selling in spot and forward markets, the RBI pursued an easy money policy, cutting the rate, CRR, and the Statutory Liquidity Ratio (SLR). The global financial crisis prompted monetary easing. The RBI also opened special forex swap facilities for oil marketing companies.

In 2013, during the taper tantrum, the rupee quickly depreciated by nearly 20-25 per cent, falling from 54 a dollar to a then-record low of near 68.8 in August while forex reserves dropped by $30 billion to $270 billion.

The RBI’s response was to open the Foreign Currency Non-Resident (Bank) – FCNR(B) – swap scheme (September-November 2013), attracting $34.3 billion in foreign currency deposits from non-resident Indians by subsidising swap costs. This time, too, it shifted the public sector oil companies’ dollar demand directly to RBI reserves outside the open market and tightened liquidity. The central bank also hiked the rate of the Marginal Standing Facility – a window for overnight funds from the central bank in emergencies.

The rupee recovered from its low of 68.85 a dollar to around 62 within a few months – a 10 per cent appreciation – and foreign exchange reserves bounced back from $275 billion in mid-2013 to over $350 billion by early 2015.

In calendar year 2025, the rupee depreciated about 4.7 per cent, and in the current year, it hit an all-time low of 96.96 in May, representing a 7.3 per cent depreciation.

This prompted the RBI to announce a three-part dollar-rupee swap window for FNCR(B), external commercial borrowsings (ECBs) and overseas foreign currency borrowings (OFCBs). They opened on June 8 and the FCNR(B) window closed on August 31, a month before the scheduled cessation because of strong response. Overall, this scheme raised $143.6 billion, including $132.98 billion through the FCNR(B) channel.

Even that could not arrest the slide of the local currency. In the last week of June, foreign exchange reserves were close to $667 billion. Leveraging the FCNR(B) inflow, they climbed to $785.7 billion in the first week of September. Since then, they have fallen to $726.3 billion as of October 9, dropping almost $60 billion in six weeks.

Emulating the Chinese playbook, the RBI introduced a 20 per cent cash reserve requirement on any forex derivatives contract exceeding $2 million. This measure, dubbed the Foreign Exchange Risk Reserve (FERR), obliges banks to earmark a portion of their total exposure and hold it with the RBI.

In stage two, the scope of FERR was broadened to encompass non-deliverable contracts involving the rupee for non-resident customers intended primarily for hedging purposes.

Simultaneously, the ceiling on foreign exchange derivative transactions for clients who do not need to demonstrate underlying exposure was reduced from $100 million to $5 million. This limitation also applies to exchange‑traded currency derivatives priced in rupees.

Additionally, banks are prohibited from allowing corporate clients to rebook foreign exchange derivative contracts once they have been canceled, covering both deliverable and non‑derivable markets. Rollovers of currency derivatives at maturity may continue.

Finally, the RBI opened a dedicated window to satisfy the dollar demand of public sector oil companies.

The ultimate objective across all these actions is to suppress speculation within the foreign exchange market.

Following the near‑crossover to 96.00 to the dollar on October 9, the rupee rebounded to 94.96 on October 16. Will this trajectory persist? What other levers does the RBI possess?

Indeed, achieving stability in the currency arena carries costs. Because banks must park 20 per cent of their swap liabilities with the RBI, they lose accessible capital for lending. Consequently, these expenses are eventually transposed onto corporate entities, curbing speculative activity, discouraging excessive hedging among importers, and impacting balance sheets.

“We have witnessed exporters holding onto dollars harvested from trade hesitant to sell ahead of further depreciation, while importers aggressively over‑hedged—creating a supply gap. This leads to what analysts label the lead‑lag phenomenon.”

Beyond pure foreign exchange headwinds, the situation involves an underrated asset valuation issue. Indian equities lack international appeal even as the currency remains oversold. Attracting foreign capital flow becomes critical. Potential avenues include offering tax incentives, adjusting asset price levels, stimulating domestic demand, or even revising the policy rate.

“At present, there is only one viable option: permit the rupee to find its equilibrium through a measured, calibrated process. The real adversary is the price of oil. Should energy costs fall, the issues could resolve themselves, at least interregnally. For the moment, the economy should not be strangled.”

The RBI ought to apply the Chinese wisdom: “Abandoning the root to chase the tips or branches.” The solution lies in tackling the fundamental cause.”
The writer is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book: Roller Coaster: An Affair with Banking. To read his previous columns, log on to www.bankerstrust.in. X: @TamalBandyo _

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