RBI Sells Dollars to Support Rupee as Currency Nears Record Low on Oil Surge

The Reserve Bank of India sold dollars in both onshore and offshore markets Monday to stem the rupee’s slide, as a renewed rally in crude oil prices pushed the currency toward its weakest level on record, traders familiar with the matter said.

The rupee fell as much as 0.2% to 96.4575 per dollar intraday, according to one report, and touched 96.53 per dollar, its weakest since mid-May, according to another. It closed at 96.4450 or 96.45 per dollar, down about 0.2% from Friday’s close. The intervention, combined with an afternoon pullback in oil prices, helped the currency recover from its session low.

The decline brought the rupee within striking distance of its record low of 96.9650 touched in late May. The RBI had stepped in earlier this year to defend that level as well.

Oil prices have jumped more than 20% over the past two weeks, with Brent crude briefly trading above $90 a barrel Monday. The surge followed a sharp escalation in the US-Iran conflict after a fragile peace deal collapsed, with US forces striking Iran for a ninth consecutive day and Iran firing missiles toward Jordan. Bahrain activated missile warning sirens. Concerns over oil supplies through the Strait of Hormuz intensified after reports that two oil tankers had exploded and become immobilised.

Crude comprises over two-thirds of India’s import bill, making the world’s third-largest oil importer highly vulnerable to price swings. Higher energy costs strain India’s foreign exchange reserves and upset the economy’s growth-inflation balance.

“The Indian rupee commenced the week under pressure, weighed down by escalating geopolitical tensions that catalysed a rally in crude oil prices and risk-averse sentiments. However, anticipated intervention by the central bank successfully capped the currency’s downside,” Dilip Parmar, senior research analyst at HDFC Securities, told Business Standard.

The RBI sold dollars through state-owned banks, traders said. “The nationalised banks were seen selling dollars,” a dealer at a state-owned bank told Business Standard. The central bank also intervened in offshore markets, Bloomberg reported, citing traders not authorized to speak publicly. An RBI spokesperson did not respond to a request for comment.

“Higher energy prices mean that the Federal Reserve will have to remain alert, and in this environment we struggle to see that any investors already owning dollars will be inclined to sell,” analysts at ING said in a note cited by The Economic Times. Markets are pricing about 36 basis points of rate increases by the Fed over the next 12 months, while swap markets in India price about 70 bps of hikes by the RBI over the same period.

Foreign institutional investors sold equities worth a net Rs 376.41 crore on Friday, exchange data showed, adding to pressure on the rupee. The dollar index was steady at 100.7, while Asian currencies traded mixed.

Policy Measures and Inflows

The RBI and government have taken steps to bolster the rupee. On June 5, policymakers eased rules for investments in domestic bonds and encouraged dollar deposits from non-resident Indians under the FCNR(B) scheme. Till July 17, total inflows under the concessional swap scheme stood at $20.72 billion, of which FCNR(B) deposit flows were $17.41 billion, RBI data showed.

However, analysts said the inflows have had limited impact. Despite mobilizing about $20 billion, the rupee remains near record lows, Ritesh Bhansali, vice president at Mecklai Financial Services, told Business Standard. “That suggests FCNR(B) inflows alone are unlikely to support the currency. With the RBI carrying a large short forward book, it has limited room to allow the rupee to appreciate as any dollar inflows are likely to be absorbed either to build reserves or reduce the forward book,” he said.

Barclays Bank Plc strategists, including Mitul Kotecha, wrote in a note that “the RBI’s recent measures to encourage FCNR inflows appear to be falling short of expectations.” Barclays estimates FCNR-related inflows of $25 billion to $30 billion over the coming months under its base-case scenario, below market expectations of $40 billion to $50 billion, Bloomberg reported.

The rupee has fallen 1.85% against the dollar in July and 5.67% since the start of the West Asia war in late February. India’s foreign exchange reserves increased by $964 million to $675.157 billion in the week ended July 10, RBI data released Friday showed.