The Indian rupee on Monday, 12 October opened more than 1% higher at 95.76 against the US dollar, after the Reserve Bank of India (RBI) deployed its most sweeping foreign exchange intervention measures since the 2013 taper tantrum to arrest the currency's slide and restore market order.

How the Rupee Moved

The rupee's opening gain followed sharp moves in offshore markets as well. One-month non-deliverable forwards (NDFs) showed the currency strengthening as much as 2.7% to 94.17 per dollar before paring the advance to 0.7%, according to reports. The central bank was pushed into action after the rupee had approached a record low near 97 per dollar, with analysts expecting the RBI to actively defend that level when spot trading resumed.

Key RBI Measures to Curb Speculation

Earlier in October, the RBI announced a package of regulatory curbs targeting speculative activity in the foreign exchange derivatives market. The threshold for unhedged foreign exchange derivative transactions was slashed from $100 million to $5 million, significantly narrowing the space for large speculative positions.

The central bank also introduced a 20% Foreign Exchange Risk Reserve (FERR). Under this framework, authorised dealers are required to maintain with the RBI a cash reserve equal to 20% of the rupee-equivalent notional amount for all foreign exchange derivative contracts involving the rupee — where the notional value exceeds $2 million equivalent and the contract is used to hedge current account exposures involving the purchase of foreign currency against the rupee. The reserve must be maintained daily until the contract is terminated.

Additionally, authorised dealers have been directed not to permit users to rebook any cancelled foreign exchange derivative contract involving the rupee — whether deliverable or non-deliverable — with any authorised dealer after the issuance of these directions. Rollovers on maturity, however, continue to be permitted.

To prevent circumvention, the RBI stipulated that any attempt to split transactions to stay below thresholds will be treated as a violation. Dealers are required to report FERR details daily through the Centralised Information Management System.

Special Window for State-Run Oil Companies

Separately, on the preceding Saturday, the RBI opened a special window to meet the dollar requirements of state-run oil companies — a targeted step to reduce pressure on the spot market from large, predictable dollar buyers. The central bank also raised interest rates on Wednesday and signalled openness to further monetary tightening if required.

What Analysts Are Saying

Galvin Chia, emerging Asia strategist at Société Générale in Hong Kong, said the breadth of measures highlights that the RBI had been 'behind the curve on FX defence, given the slew of measures that have been necessary this year.' The assessment reflects a broader market view that the central bank's response, while forceful, came after the rupee had already absorbed significant depreciation pressure.

Notably, the directions under Circular 25 came into force with immediate effect, while FERR directions under Circular 26 apply to contracts undertaken after issuance. The RBI stated that the measures are intended to 'strengthen market discipline and ensure appropriate risk management while maintaining an orderly and transparent market environment.'

With the rupee's near-term trajectory now closely tied to the central bank's resolve to defend the 97-per-dollar level, markets will be watching both the pace of dollar intervention and any further rate signalling from the RBI in the sessions ahead.