RBI’s measures on the rupee have bought government time. Reforms are the long-term fix- Moneycontrol.com

Likewise, the new 20% Foreign Exchange Risk Reserve (FERR), a cash deposit with the RBI for all currency derivative contracts exceeding USD 2 million would put a brake on speculation although it would also hurt genuine importers by increasing the cost of cover. These measures seemed to have worked going by the rupee’s smart rebound.

Currency revaluation angle

Interestingly, more than trade deficits or RBI intervention, it was currency revaluation that is said to have played the bigger role in FX reserve depletion. This is also not apparent but with 80% of FX reserves consisting of foreign government securities and with benchmark U.S. 10-year Treasury yield continuously rising to a high 5.35%, the market value of securities held was falling.

Then, there is also the cross-currency revaluation effect of other currency assets at the RBI (Euro, Yen, Sterling) all of which had been falling against the US dollar. Though these are only ‘paper’ losses, they impact the headline foreign exchange reserves which are reported in USD.

RBI’s toolkit is limited when dealing with underlying causes

While the RBI measures worked against speculation, the RBI’s toolkit is limited when it comes to tackling the real issues behind the rupee’s fall, namely, persistent trade deficits, high imported oil dependency and rising US treasury yields.

These are the very factors that force the RBI to maintain a large FX reserve cushion with its attendant high costs. The decline of $50 billion in reserves can be said to be the combined effect of RBI intervention (about $12 billion dollar sales), trade deficits (about $14 billion), capital outflow from FPIs (about $ 4 billion) and approximately $ 20 billion from the revaluation effects above.

Asset revaluation has an outsized impact on reserves which is not very intuitive, especially on the upside. This is a double-edged sword, as the RBI report on foreign exchange reserves for March 2026 shows, where asset revaluation led to reserves increasing by $ 20 billion. This is much the case with speculation which does not show up as a line item but is evident from rising rates showing up in import bills and capital outflows.

The RBI’s stated policy objective has always been one of targeting volatility, not a specific exchange rate. But that never stopped it from direct intervention in phases of crises when it sold dollars by drawing down to support the rupee.

An earlier RBI research paper had even concluded that that it may be more effective to throw sand in the wheels to dampen exchange rate volatility than attempt to influence exchange rates by draining reserves. Interestingly, the RBI seems to have turned to this approach only after having drained nearly $12.5 billion in about four weeks to arrest the rupee’s slide.

In the longer term, until the core weaknesses are addressed, the rupee will remain susceptible to speculative attacks. The RBI’s firepower will not be enough and will need the support of the government in the form of specific fiscal and economic measures that address the problems of oil and dollar dependency and the flight of foreign capital.

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