India unveils tough curbs on dollar demand to defend rupee

The central bank will open a special window to meet the daily dollar needs of three state-run oil-marketing companies.

MUMBAI – India on Oct 10 unveiled fresh measures to shore up the rupee, redirecting oil companies’ dollar purchases away from the spot market and tightening hedging rules as the currency hovers near record lows.

The steps by the Reserve Bank of India (RBI) come as persistent pressure on the rupee, fuelled by surging oil prices and global bond yields, has driven the currency down by more than 7% in 2026.

The central bank will open a special window to meet the daily dollar requirements of three state-run oil-marketing companies, easing pressure on the spot market.

Under such an arrangement, used during periods of currency stress, the RBI provides oil companies dollars directly from its foreign exchange reserves. Indian Oil, Hindustan Petroleum and Bharat Petroleum will be allowed to access the facility from Oct 12, the RBI said.

“Addressing oil companies’ dollar requirements removes one of the largest sources of demand from the FX market, which should help reduce volatility, but it will show up in a depletion of reserves,” said Dhiraj Nim, foreign exchange (FX) strategist at ANZ Bank in Mumbai.

After the steps were announced, the rupee strengthened by about 0.6% against the dollar in the non-deliverable forward market, albeit in thin trading.

Elevated demand for protection against further rupee losses has weighed on the currency in recent months, with importers’ appetite for dollars far exceeding exporter supply.

The RBI has responded by tightening rules on speculative corporate activity and raising the cost of protection against further rupee weakness.

It is “trying to moderate potentially destabilising derivative demand, improve the integrity of underlying exposure verification and discourage circumvention through multiple transactions or repeated rebooking”, a person familiar with the central bank’s thinking said, commenting on condition of anonymity as they are not authorised to speak to the media.

The central bank has mandated that forex dealers maintain a 20% “foreign exchange risk reserve” on derivative contracts used to buy foreign currency against the rupee, for the purposes of hedging current account transactions. The requirement applies to transactions with a notional value exceeding US$2 million (S$2.6 million).

The reserve requirement will lift the cost of buying protection against further rupee weakness, helping to discourage excessive hedging, two bankers said, speaking on condition of anonymity.