Forex traders said the policy announcements lifted investor sentiment, with the central bank also underscoring that India’s sizeable foreign-exchange reserves provide a strong buffer against external shocks.
Also Read: RBI courts overseas investors as oil prices and capital outflows weigh on rupee
For months, the Indian rupee has been caught in the crossfire of forces far beyond New Delhi’s control.
A surge in crude oil prices triggered by the escalating conflict involving Iran, a flight of global capital towards safe-haven assets, and growing uncertainty across financial markets have combined to put renewed pressure on India’s currency. For a country that imports more than 85% of its crude oil needs, every jump in oil prices widens the trade deficit, increases demand for dollars and raises concerns about inflation.
The rupee’s weakness has revived a familiar question for policymakers: how much should the Reserve Bank of India do to protect the currency?
The answer from Governor Sanjay Malhotra on Friday was strikingly clear. The RBI will allow market forces to determine the currency’s value and intervene only when volatility becomes disruptive.Yet, even as Malhotra reiterated the central bank’s approach to the exchange rate, the RBI simultaneously unveiled one of its most comprehensive packages in recent years aimed at attracting foreign capital into India.
The message was subtle but unmistakable: the RBI intends to make India more attractive to global capital.
Also Read: RBI raises investment limits for NRIs, OCIs; Extends equity route to overseas individuals
In a series of measures announced alongside the monetary policy decision, the central bank widened access for foreign investors to government bonds, relaxed investment norms for overseas Indians and foreign residents, encouraged overseas borrowing by public sector companies, and offered incentives for banks to mobilise foreign-currency deposits.
Taken together, the measures represent a broader strategy to strengthen India’s external finances at a time when global shocks threaten to test emerging-market currencies.
“We do not target any specific level or band,” Malhotra said. “Instead, we allow the exchange rate to be determined by market forces.”
The governor, however, was equally clear that the RBI would not hesitate to step in if speculation or uncertainty triggered excessive volatility.
That distinction is important. Rather than using precious foreign-exchange reserves to resist every bout of rupee weakness, policymakers appear increasingly focused on addressing the supply side of dollars entering the economy.
The centrepiece of Friday’s package was the decision to expand the Fully Accessible Route (FAR) for foreign investors. All new issuances of 15-year, 30-year and 40-year government securities will now be available to overseas investors without investment caps. The RBI also removed certain restrictions related to short-term holdings and concentration limits.
The move came while the government announced fresh tax incentives for investments in government securities, creating a coordinated push to make Indian sovereign debt more attractive to global funds.
The timing is hardly coincidental.
Since the outbreak of the U.S.-Israeli conflict with Iran, benchmark crude prices have climbed sharply, reigniting concerns over India’s current account deficit and imported inflation. At the same time, geopolitical tensions have encouraged investors to shift money towards traditional safe havens such as the U.S. dollar and Treasury securities, leading to capital outflows from several emerging markets.
For India, the combination is particularly uncomfortable. Higher oil prices increase the country’s import bill while foreign outflows reduce the availability of dollars, creating a double squeeze on the rupee.
The RBI’s response has been to widen as many channels as possible through which foreign currency can flow into the country.
One such channel is the Indian diaspora.
The central bank increased investment limits for non-resident Indians (NRIs) and Overseas Citizens of India (OCIs) in listed Indian equities without requiring registration with market regulator SEBI. More significantly, similar access has now been extended to all individual investors residing outside India, broadening the pool of potential foreign capital.
Another channel is overseas borrowing.
The RBI announced a concessional foreign-exchange swap facility for external commercial borrowings raised by public sector companies until September 30. Banks mobilising foreign-currency non-resident deposits will receive similar support, with the central bank absorbing the entire hedging cost.
The incentives effectively reduce the cost of raising dollars abroad and channeling them into the domestic financial system.
The central bank also restored the export realisation period to nine months from the temporary 15-month window that had been introduced earlier. The move should encourage quicker repatriation of export proceeds, improving foreign-currency liquidity within the economy.
Individually, none of these measures is likely to transform the rupee’s fortunes overnight. But collectively they reveal the RBI’s preferred playbook.
Rather than fighting currency weakness directly, the central bank is attempting to improve the balance of payments, deepen foreign participation in Indian markets, and ensure a steady supply of dollars into the financial system.
It is a strategy built on attraction rather than defence.
For now, policymakers appear willing to tolerate a weaker rupee if it reflects underlying economic realities. What they are unwilling to tolerate is disorder.
As global markets navigate another period of geopolitical turbulence, the RBI’s message is that the rupee can find its own level. The central bank’s job is not to decide where that level should be, but to ensure the journey there remains orderly.