The rupee’s 1% jump marked its strongest single-day gain in six months after the Reserve Bank of India (RBI) introduced new measures to support the currency. The move came as the rupee approached a record low of 97 per dollar.

The Indian currency gained 1% to 95.7575 per dollar on Monday, recording its biggest daily rise since April. The rally followed the RBI’s latest steps to curb pressure on the foreign exchange market and limit speculative positions.

However, the currency’s recovery comes against a challenging backdrop. The rupee has weakened 7% this year, making it one of Asia’s worst-performing currencies. The RBI’s latest measures aim to provide near-term support, but economists warn that these steps may not address the underlying pressures.

What Triggered the Rupee’s 1% Jump?

The RBI announced a series of measures on Saturday after the rupee moved close to a record low. These include a special window to meet the dollar requirements of state-run oil companies and new reserve requirements for certain foreign exchange derivatives.

For the first time, the central bank introduced a foreign exchange risk reserve. Under this measure, lenders must maintain a reserve with the RBI equivalent to 20% of the notional value of each foreign exchange derivative transaction exceeding $2 million.

The move targets demand in the foreign exchange derivatives market by increasing the cost of certain transactions. The People’s Bank of China uses a similar mechanism to manage pressure on the yuan by adjusting reserve requirements for forward contracts.

The RBI had also raised interest rates on Wednesday and indicated that further tightening remained an option. Together, these actions reflect the central bank’s efforts to stabilize the currency amid sustained pressure on the foreign exchange market.

Key Highlights

• The rupee gained 1% to 95.7575 per dollar, its biggest daily rise since April.
• The RBI introduced a 20% reserve requirement for certain forex derivative transactions above $2 million.
• India’s foreign exchange reserves fell by $51 billion over four weeks amid efforts to support the rupee.

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Can RBI Measures Deliver Lasting Rupee Support?

The RBI has taken several steps to strengthen its foreign exchange resources. Its diaspora deposit program raised a record $133 billion, helping push India’s foreign exchange reserves close to $800 billion in early September.

However, continued pressure on the currency has reduced those reserves. India’s forex reserves fell by $51 billion over the following four weeks as the RBI sought to defend the rupee.

Madhavi Arora, lead economist at Emkay Global Financial Services Ltd., described the latest steps as tactical fixes rather than structural solutions. She said the measures could limit speculative positions, increase hedging costs, tighten banking liquidity, and provide near-term support to the rupee.

At the same time, the bond market reflected a different trend. The benchmark 10-year government bond yield rose five basis points to 7.35%, its highest level since November 2023.

RBI Governor Sanjay Malhotra has said the rupee appears undervalued on some measures, while noting that markets can behave irrationally in the short term.

The rupee’s 1% jump signals a response to the RBI’s intervention, but the currency’s broader performance remains under pressure. Whether the gains continue will depend on market conditions and the effectiveness of the central bank’s measures.