The Indian rupee has returned to near-record lows, raising questions among investors about the Reserve Bank of India’s (RBI) currency intervention strategy amid growing uncertainty over how much depreciation policymakers are willing to tolerate. The rupee has declined nearly 2% this month, marking the weakest performance among Asian currencies, and has reversed earlier gains made in June following lower oil prices and government initiatives to attract dollar inflows.
Market participants and analysts attribute the confusion to divergent views within the RBI regarding the appropriate level of intervention. According to multiple sources, some senior officials favor a softer approach, intervening only to contain excessive volatility while allowing the currency to reflect underlying economic fundamentals. This marks a departure from expectations of more active central bank support after RBI Governor Sanjay Malhotra pledged the bank would take "whatever is required" to maintain orderly currency movements.
Investors have closely monitored the RBI’s actions amid broader efforts by India to bolster foreign currency reserves. The government’s recent measures aimed at enhancing dollar deposits from its overseas diaspora and attracting foreign debt inflows have generated over $20 billion in around one month, raising hopes of meeting an annual inflow target of $40 billion to $60 billion. Nonetheless, the steady influx of dollars has not prevented the rupee’s depreciation, shifting focus back to the RBI's intervention policy.
Sources familiar with the RBI’s internal deliberations highlighted a clear divide among officials. Governor Malhotra and Deputy Governor Poonam Gupta, both appointed from outside the central bank, reportedly advocate allowing market forces a greater role in determining the rupee’s level while prioritizing intervention only to moderate sharp swings. Both officials are said to view the currency’s decline as a necessary adjustment to evolving macroeconomic factors, including a higher oil import bill that weighs on the country’s external position.
The rupee’s weaker performance relative to other oil-sensitive regional currencies suggests that India-specific factors are contributing to its decline, analysts noted. Michael Wan, senior currency analyst at MUFG Bank in Singapore, observed that the RBI’s interventions have been limited and sporadic, with little evidence of significant dollar selling. On the contrary, he suggested the central bank may be accumulating foreign exchange reserves amid the recent volatility.
As the rupee continues to fluctuate near historic lows, market participants remain uncertain about the central bank’s tolerance for further depreciation and the potential for more active policy support. This ambiguity complicates hedging and speculative activity in the foreign exchange market, where clear guidance on intervention thresholds is crucial to managing volatility.