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The rupee has rebounded and is currently around 95/$ against the US dollar after the measures taken by the Reserve Bank of India(RBI) to halt the sharp decline. Though the Indian currency has seen some recovery, experts believe though this could slow down the pace of depreciation in the medium term, it is unlikely to trigger a reversal in trend.
IDFC First Bank said that several measures have been taken to stabilise the rupee but “these measures are expected to result in a near-term reduction in USD/INR as well as lower forward premiums.” However, “over the medium term, the trajectory of USD/INR will be determined by global factors and balance of payment dynamics.”
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According to IDFC First Bank, elevated crude oil prices, high US bond yields and weak capital inflows could continue to weigh on the rupee over the medium-term.
RBI’s oil dollar window changes dollar sourcing route, not demand
The RBI’s separate dollar supply window for oil marketing companies (OMCs) is expected to reduce their dependence on the spot foreign exchange market, easing immediate demand for dollars.
India’s oil import bill is estimated to average around $20 billion per month in the first half of FY27. The three major OMCs account for around 60% of petroleum imports, translating into a monthly import bill of approximately $12 billion.
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Under the new arrangement, OMCs will source dollars through designated banks instead of directly adding to demand in the spot market. This is expected to reduce day-to-day volatility in the USD/INR exchange rate.
IDFC First Bank said that “this measure doesn’t increase the drawdown on reserves, it only changes the route through which OMCs source dollars.”
The overall impact on foreign exchange reserves will depend on how the RBI manages the resulting dollar flows, IDFC First Bank noted.
RBI’s FERR may cause temporary Rs 20,000 crore liquidity drain
The RBI’s new Foreign Exchange Risk Reserve (FERR) requirement is expected to discourage excessive importer hedging and reduce additional dollar demand.
When the rupee depreciates, importers typically increase hedging to protect themselves against further currency losses, while exporters tend to reduce their hedging activity. This difference can increase demand for dollars and add to depreciation pressure.
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Under the FERR mechanism, banks will have to maintain a reserve equivalent to 20% of the notional amount of eligible foreign exchange derivative contracts involving the rupee. The requirement will apply to contracts used to hedge current account exposures where customers purchase foreign currency, including importers.
IDFC First Bank estimates that the measure could increase importer hedging costs by around 1.5%, discouraging some transactions. A more stable rupee could also encourage exporters to hedge more actively.
The bank expects the measures to support a near-term decline in the USD/INR exchange rate and lower forward premiums as hedging activity moderates.
However, the FERR requirement will also temporarily withdraw liquidity from the banking system.“The liquidity drain from this measure is estimated at around Rs 20,000 crore per month but this will be temporary, depending on how long the measure remains in place and the duration of the derivative contract.”
The RBI has also reduced the threshold for foreign exchange derivative transactions without an underlying exposure to $5 million from $100 million. The move is expected to curb speculative positions against the rupee without affecting genuine hedging activity.
Rupee outlook to depend on capital inflows and crude oil prices
Despite the RBI’s interventions, IDFC First Bank expects global conditions and India’s balance of payments to remain the key drivers of the rupee over the medium term.
IDFC First Bank expects the underlying balance of payments to remain under pressure even after accounting for the improvement in foreign currency inflows from the FCNR(B) deposit scheme.
The FCNR(B) inflows have largely been absorbed by the RBI through its swap window, which closed on September 11. Their impact on the currency will depend on how the RBI deploys the dollars for spot market intervention.
IDFC First Bank also noted that these inflows represent borrowed foreign currency that must be repaid after three to five years. The RBI may therefore remain cautious about selling dollars aggressively if depreciation pressure persists.
India’s external funding position could remain challenging as capital inflows struggle to keep pace with its financing requirements.
IDFC First Bank expects the current account deficit to widen to 1.8% of GDP in FY27, reflecting higher crude oil prices and increased electronic goods imports.
Although net foreign direct investment (FDI) inflows improved to $13.8 billion in April-August FY27 from $6.7 billion in FY26, the bank expects the basic balance, which combines the current account balance and net FDI inflows, to remain in a deficit of 1.3% of GDP in FY27.
This would be its weakest level since FY13 and could increase India’s dependence on more volatile capital flows to finance its external deficit.
Conclusion
Along with measures, the bank liquidity was also announced to drain with Rs 25,000 crore of OMO sales in October and tightened CRR maintenance to 99% daily from 90%.
While all these RBI’s measures may ease immediate dollar demand, curb speculative positions and slow the rupee’s depreciation, they may not be enough to reverse the trend over the medium term, according to IDFC First Bank. Instead, the rupee’s trajectory will largely depend on crude oil prices, US bond yields and the pace of capital inflows.
TOPICSECONOMYFDIThis article was first uploaded on October thirteen, twenty twenty-six, at eight minutes past five in the evening. © IE Online Media Services (P) Ltd