Markets · · 2 min read
RBI steps in as India’s rupee nears record low and reserves drop $13bn
India's central bank is spending reserves to slow the rupee's slide as costly oil imports bite, a defense that buys time but cannot change the forces behind the weakness.
The short answer
The Financial Times (FT) reported that the Reserve Bank of India is trying to support the rupee as it nears record lows, pressured by energy costs tied to the Iran war. India's reserves fell $12.95 billion in the week to October 2. The rupee closed at 96.71 per dollar on Friday, helped by likely central bank dollar sales.
What’s going on here?
According to the Financial Times (FT), the Reserve Bank of India (RBI) is working to shore up the rupee as it approaches record lows, with higher energy costs from the US-Israel war on Iran weighing on the currency. RBI data released on Friday showed foreign exchange reserves fell $12.95 billion to $734.61 billion in the week ended October 2, after an $18.34 billion drop the week before. The rupee gained 17 paise to close at 96.71 per dollar on Friday, its first rise after three days of losses, with traders citing likely central bank intervention, the Press Trust of India reported.
What does this mean?
A country's currency weakens when more money is flowing out than coming in. For India, two outflows stand out. The country imports nearly 85% of its fuel, CNBC reported, so higher oil prices mean importers need more dollars to pay for every barrel. At the same time, foreign investors have kept selling Indian shares, a pattern that has pressured the rupee for much of 2026. Foreign institutions sold a net 3,568.90 crore rupees of Indian stocks on Friday alone, exchange data showed.
Central banks defend a currency by selling some of their dollar reserves and buying their own currency. Traders have often seen state-run banks offering dollars as a sign that the RBI is acting, according to the market news site InvestingLive. Its pattern this year has been to slow a sharp slide rather than to defend one fixed level. The weekly reserves data fits that picture: foreign currency assets alone fell $10.66 billion, while gold holdings lost $2.29 billion. Some of that drop can reflect changes in asset values, not only dollar sales.
The RBI is also using interest rates. On October 7 it raised its main repo rate by a quarter point to 5.50%, its first increase since 2023, and Governor Sanjay Malhotra said cuts were off the table for now. Retail inflation had risen for 10 straight months to 4.8% in August, above the bank's 4% target. Higher rates can make rupee assets more attractive to foreign savers, which supports the currency over time.
Reserves are still large. Even after the recent falls they were $43.5 billion above their end-March level and $34.6 billion higher than a year earlier, RBI figures showed. That gives the central bank room to keep smoothing moves, though every week of heavy selling narrows it.
The bull case
India still has hundreds of billions of dollars in reserves and an economy the RBI expects to grow 7.1% this year, the fastest among major economies. Friday's rebound came as oil eased after President Trump said the US would hold off on military action against Iran before the midterms. If energy prices cool and the rate hike draws foreign money back, pressure on the rupee could fade.
The bear case
Reserves fell by more than $31 billion across two weeks, and foreign investors are still selling Indian shares. As long as oil stays near $100 a barrel, India's import bill keeps draining dollars. A break past the record low could make the decline self-reinforcing, push up the cost of imported goods, and force the RBI to raise rates further, which would weigh on growth and Indian bonds.
Why should I care?
For markets:
A weaker rupee tends to hurt Indian importers and companies with dollar debt, while helping exporters such as IT services firms. Foreign holders of Indian stocks and bonds also lose value when they convert back into dollars.
The bigger picture:
Emerging-market funds often have large weightings in India, so currency swings can affect returns for overseas investors even when local share prices rise. The episode also shows how oil shocks travel well beyond the countries at war.
Market impact
| Asset (ticker) | Potential direction | Timeframe | Confidence | Reason |
|---|---|---|---|---|
| iShares MSCI India ETF (INDA) | ↓ bearish | Short term | Medium | Rupee weakness cuts dollar returns for foreign holders of Indian shares. |
| Infosys (INFY) | ↑ bullish | Short term | Low | IT exporters earn in dollars and can benefit when the rupee weakens. |
| Indian 10-year government bond yield | ↑ bullish | Long term | Medium | Further RBI rate hikes to defend the rupee would push yields higher. |
Potential impact, not investment advice.
Frequently asked questions
Why is the Indian rupee falling?
The rupee is under pressure mainly because oil prices rose after the Iran war began, and India imports nearly 85% of its fuel, so it needs more dollars. Foreign investors have also been selling Indian shares, taking money out of the country. Both forces raise demand for dollars relative to rupees.
How is the RBI supporting the rupee?
The Reserve Bank of India sells dollars from its reserves to buy rupees, often through state-run banks, which slows the currency's decline. Reserves fell $12.95 billion in the week to October 2. The RBI also raised its repo rate to 5.50% on October 7, which can make rupee assets more appealing to foreign investors.
How much foreign exchange reserves does India have?
India held $734.61 billion of foreign exchange reserves in the week ended October 2, RBI data showed. That was down $12.95 billion on the week, mostly from foreign currency assets, but still about $43.5 billion above the level at the end of March 2026 and about $34.6 billion above a year earlier.
Sources: Financial Times, The Tribune (ANI), ThePrint (PTI), CNBC, InvestingLive
