The Reserve Bank of India is actively considering its full toolkit to arrest the rupee’s slide — including an interest rate hike, additional currency swaps, and raising dollars from overseas investors — as Governor Sanjay Malhotra and top officials hold a series of internal meetings to decide how far the central bank is willing to go to defend the currency, according to Bloomberg.
The rupee recovered on Thursday morning, May 21, trading around ₹96.20 per dollar in early interbank trade after settling at a record low of ₹96.82 on Wednesday — its worst closing level ever. Traders attributed the recovery to RBI dollar-selling intervention rather than any fundamental shift in the macro picture. USDINR futures were trading near ₹96.59 on Thursday morning.
What the RBI is considering
Three instruments are reportedly on the table in internal discussions, each with materially different implications for the economy.
A rate hike would be the most significant and consequential option. The RBI had pivoted to an easing cycle earlier this year, cutting the repo rate as growth concerns mounted. Reversing that pivot — raising rates to defend the rupee by widening the interest rate differential with the US — would signal that the currency crisis is severe enough to override the domestic growth agenda. It would raise borrowing costs for Indian businesses and consumers at precisely the moment the economy is absorbing elevated fuel prices. It would also send a message to foreign investors that India is willing to prioritise currency stability over growth — a message that could attract bond inflows but would compress equity valuations.
Additional currency swaps build on the $5 billion swap auction already announced for May 26. Swaps inject rupee liquidity while absorbing dollars — a tool that addresses the domestic liquidity squeeze created by the RBI’s own foreign exchange market intervention without the permanence of a rate move. The limitation is that swaps are reversible and do not change the fundamental dollar demand-supply imbalance.
Overseas dollar bonds — a sovereign or quasi-sovereign fundraise from non-resident investors — would directly augment foreign exchange reserves. India last used this mechanism in 2013, when the RBI raised $30 billion through NRI deposit schemes at around 3.5% during the taper tantrum. That option is significantly more expensive now, with the Federal Reserve’s target rate at 3.75% and global hedging costs elevated. The cost-benefit calculation is marginal at best, but if reserves continue falling — already down approximately $32 billion since the war began — it may become necessary regardless of cost.
Why the rupee keeps falling
The rupee has been under pressure for nine consecutive sessions, driven by a structural current account problem that no amount of intervention can permanently resolve. India imports approximately 85% of its crude oil requirements. A 50% surge in oil prices since the Iran war began means the dollar outflow for oil imports has expanded dramatically — widening the current account deficit, increasing corporate dollar demand for import payments, and triggering FII outflows from equity and debt markets as global risk appetite contracts.
Every dollar the RBI sells to defend the rupee reduces the foreign exchange buffer available for future intervention. With reserves already down $32 billion, the RBI is spending finite resources to fight an infinite macro headwind — a position that is sustainable only if oil prices fall, the Iran situation resolves, or foreign capital inflows offset the outflows.
Wednesday’s crude oil crash of over 6% — driven by reports that a US-Iran deal may be hours away — provided exactly the kind of external relief the RBI cannot manufacture domestically. The rupee’s Thursday recovery of approximately 60 paise from its record low is partly a function of that oil price move rather than purely RBI action.
The rate hike dilemma
An interest rate hike in this environment would be a significant reversal. The RBI had been moving toward accommodation as Indian growth faced headwinds from global uncertainty. Tightening now would add another headwind — higher EMIs for households, higher borrowing costs for businesses, and reduced credit growth — at a time when the economy is already absorbing the inflationary shock of higher fuel and commodity prices.
The case for a hike rests on one argument: that a credible signal of monetary tightening would slow rupee depreciation by making rupee assets more attractive to foreign investors, reducing the pressure on the central bank to intervene using reserves. The case against is that the rupee’s weakness is driven by a current account shock — not by monetary conditions — and that a rate hike addresses the symptom while making the disease worse by slowing the domestic economy further.
What Thursday’s recovery means
The morning recovery to ₹96.20 from ₹96.82 is meaningful but fragile. It reflects RBI intervention and an improved oil price outlook — neither of which has permanently resolved the underlying pressure. If the US-Iran deal does not materialise, oil prices recover their losses, and FII outflows continue, the rupee will test fresh lows again within days.
The RBI’s willingness to consider all options — including the politically and economically costly option of a rate hike — signals that the Governor and his team view the currency situation as serious enough to warrant tools they have not used in this cycle. Whether those tools are deployed depends on whether the external environment provides any relief in the days ahead.
This article is for informational purposes only and does not constitute investment advice. Please consult a qualified financial advisor before making any investment decisions.