India’s rupee recovery faces test from oil prices, capital outflows

[BENGALURU] India’s central bank has mounted a fresh defence of the battered rupee by redirecting US dollar purchases by state-owned oil companies and tightening foreign exchange trading rules.

However, analysts say the measures offer only temporary relief as stubbornly high crude prices and capital outflows keep the currency under pressure.

Citi analysts expect the measures to trigger a “knee-jerk” appreciation in the rupee, followed by some consolidation. They added, however, that while the package raises the near-term cost of bets against the currency, it does little to ease the underlying balance of payments pressures facing India.

The move follows the Reserve Bank of India’s (RBI) 25-basis-point rate hike to 5.5 per cent last week and its shift to a “calibrated tightening” from a “neutral” stance.

The rupee rebounded to around 95.2 against the greenback on Tuesday (Oct 13) from 96.73 at the Oct 9 close, near its record low. Its performance over the coming weeks will show if RBI’s efforts can deliver lasting stability. 

Redirecting US dollar demand to offer immediate relief

RBI’s dedicated US dollar window for Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) is one of the package’s most significant measures because it could substantially reduce their US dollar purchases in the open market.

Together, the companies account for roughly 56 per cent of India’s crude imports. The window could meet US$300 million to US$350 million of their daily US dollar demand, said Srijit Dutta, treasury consultant at Eforexindia in New Delhi.

Avinash Singh, an analyst at Emkay Research, estimated that the arrangement could divert US$11 billion to US$12 billion in monthly US dollar demand from the spot market.

The window takes oil companies’ US dollar demand out of the market, but India still has to pay for its imported crude. RBI will supply those US dollars from its foreign-exchange reserves.

Singh warned that this could mask pressure on India’s balance of payments for a time. If the window closes before external conditions improve, that pressure could spill back into the market.

There is a trade-off, however. Supplying US dollars to oil companies uses up reserves, but could mean that RBI has to sell fewer US dollars in the spot market to support the rupee, he said.

Impact across businesses

Dutta said that IOC, BPCL and HPCL are the clearest direct beneficiaries of the dedicated US dollar window. The facility allows them to obtain US dollars without competing for the same supply in the open market.

Importers, on the other hand, are likely to face higher costs as the new rules make currency hedging more expensive. Vikram Murarka, chief currency strategist at Kshitij Consultancy Services, said that “increased hedging cost will impact the importers the most, making it costlier for them to hedge”.

Analysts cautioned that higher costs and stricter documentation requirements could prompt some importers to shorten their hedges or shift transactions to offshore non-deliverable forwards. Others may defer hedging and buy US dollars in the spot market when payments fall due.

These shifts could make currency protection more difficult for genuine hedgers and affect market liquidity.

Rupee pressure more global than local

Expensive crude and foreign investors’ retreat from Indian equities are doing much of the damage to the rupee, said Murarka, adding that a stronger US dollar adds to the strain. RBI can slow the slide, he said, but reversing it will require these pressures to ease.

Murarka sees Brent crude falling below US$94 a barrel as a key condition for a sustained reversal in the rupee’s trend. That, he said, could depend on a lasting US-Iran truce, which he considers unlikely at present.

Dutta expects the rupee to trade between 95 and 96 per US dollar in the near term before drifting towards 96 to 97 over the following weeks if external pressures persist.

He identified oil prices, US inflation, India’s inflation data, forward premiums and domestic liquidity as indicators to monitor.

Vulnerable currency vis-a-vis regional peers

The comparison puts the rupee among Asia’s weakest performers in 2026, but it also shows that regional currencies have not responded uniformly to global conditions.

The rupee recorded the steepest decline against the greenback among the six Asian currencies tracked, followed by the rupiah, the baht and the peso.

The ringgit held up comparatively better while the Singapore dollar has gained, highlighting the divergence in regional currency performance.

Citi analysts nevertheless favoured the rupee and rupiah over the peso, citing the perceived willingness of RBI and Bank Indonesia to support currency stability.

The cost of defending the rupee

The effects of previous policy shocks have tended to diminish after two to three weeks, making the rupee’s performance over the coming weeks an important indicator of whether the latest intervention has had a lasting impact, cautioned Galvin Chia, an analyst at Societe Generale.

He warned that if oil prices, portfolio outflows and US yields do not reverse, the central bank may need further policy tightening or alternative measures to support the currency.

For now, RBI has bought the rupee some breathing room. The coming weeks will show whether the central bank can maintain greater stability without having to escalate its response or whether defending the rupee will become an increasingly costly exercise.

Jeff Ng, head of Asia macro strategy at Sumitomo Mitsui Banking Corporation, sees the rupee staying below 96 per US dollar until mid-November owing to the recent RBI measures. It could hold there through year-end if geopolitical tensions and worries over global fiscal sustainability ease.

If those concerns linger, the bank’s earlier forecasts of 96.40 at end-December and 96.80 at end-March 2027 could still be on the cards.

The prospect of more RBI action could also give traders pause before betting heavily against the rupee. Ng said he expects this to discourage “excessive long USD/INR positioning”, or bets on a stronger US dollar.