'RBI ready for further action to curb rupee volatility', says Governor Malhotra

Reserve Bank of India (RBI) Governor Sanjay Malhotra has asserted that the central bank is prepared to take further measures to contain excessive volatility in the foreign exchange market, signalling that it will not hesitate to intervene if speculative activity threatens the orderly movement of the rupee.

In an interview with Moneycontrol, Malhotra said the RBI remained committed to maintaining stability in currency markets and could introduce additional measures to discourage speculative trading if necessary. He emphasised that the recent regulatory steps should not be interpreted as restrictions on capital flows, drawing a distinction between measures designed to prevent excessive speculation and policies that restrict legitimate cross-border financial transactions.

The Governor's comments come amid heightened pressure on the Indian currency, driven by elevated crude oil prices, high global bond yields and uncertainty surrounding foreign capital flows. The RBI has responded with a series of interventions and regulatory changes aimed at moderating dollar demand, limiting speculative positions and ensuring that foreign exchange markets continue to function in an orderly manner.

𝗥𝗕𝗜 𝘀𝗶𝗴𝗻𝗮𝗹𝘀 𝗳𝘂𝗿𝘁𝗵𝗲𝗿 𝗮𝗰𝘁𝗶𝗼𝗻

Malhotra said the central bank would consider additional steps if the prevailing measures proved insufficient to prevent disorderly movements in the currency market. His remarks underline the RBI's determination to address excessive speculation without abandoning its established policy of allowing the exchange rate to be determined primarily by market forces.

The Governor reiterated that the RBI does not seek to defend a particular exchange rate or maintain the rupee within a predetermined trading band. Instead, its interventions are intended to ensure that price discovery remains orderly and that short-term market pressures do not result in destabilising currency movements.

He also indicated that the central bank remained optimistic about India's medium- and long-term external sector outlook despite recent volatility. According to Malhotra, market participants may have become excessively pessimistic about the currency's prospects, even as India's underlying economic fundamentals and balance of payments position continue to provide support.

𝗦𝗽𝗲𝗰𝘂𝗹𝗮𝘁𝗶𝘃𝗲 𝘁𝗿𝗮𝗱𝗶𝗻𝗴 𝘂𝗻𝗱𝗲𝗿 𝘀𝗰𝗿𝘂𝘁𝗶𝗻𝘆

Explaining the rationale behind the latest restrictions, Malhotra said the RBI had observed unusually high levels of cancellation and rebooking of foreign exchange derivative contracts over recent months. In some instances, approximately one-third of transactions were cancelled or closed on the same day they were initiated, suggesting that a significant portion of trading activity was driven by speculative positions rather than genuine hedging requirements.

The Governor said foreign exchange derivatives were primarily intended to help businesses and other market participants manage risks arising from actual foreign currency exposures, including import payments and overseas financial obligations. Frequent same-day cancellations and rebookings, he indicated, were inconsistent with the normal requirements of genuine hedging. The RBI therefore introduced restrictions to discourage excessive speculative activity and restore discipline in currency trading.

𝗧𝗶𝗴𝗵𝘁𝗲𝗿 𝗳𝗼𝗿𝗲𝘅 𝗿𝘂𝗹𝗲𝘀 𝗶𝗻𝘁𝗿𝗼𝗱𝘂𝗰𝗲𝗱

The central bank announced a series of measures on October 10, including a prohibition on rebooking cancelled rupee derivative contracts and stricter documentation requirements for foreign exchange transactions. It also reduced the threshold for certain derivative transactions undertaken without establishing an underlying exposure from $100 million to $5 million.

Another important measure was the introduction of a Foreign Exchange Risk Reserve requirement. Under this framework, banks must maintain a cash reserve equivalent to 20 per cent of the rupee value of qualifying foreign exchange derivative transactions exceeding $2 million. The requirement is intended to increase the cost of certain positions and discourage excessive speculative demand for foreign currency.

The RBI also opened a special dollar supply window for three state-run oil marketing companies — Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation — to meet their daily foreign currency requirements. By shifting their dollar purchases away from the spot market, the arrangement is intended to reduce pressure on the rupee during periods of elevated crude oil import demand.

𝗡𝗼 𝗿𝗲𝘀𝘁𝗿𝗶𝗰𝘁𝗶𝗼𝗻𝘀 𝗼𝗻 𝗰𝗮𝗽𝗶𝘁𝗮𝗹 𝗳𝗹𝗼𝘄𝘀

Malhotra rejected suggestions that the regulatory measures amounted to capital controls. He clarified that capital account transactions had been excluded from the new reserve requirements applicable to customers, allowing foreign investors to continue participating in Indian financial markets and managing their currency exposures.

Foreign portfolio investors would remain free to invest in equities, government and corporate debt, while external commercial borrowings and associated hedging arrangements would continue under the existing regulatory framework. The Governor stressed that the RBI's objective was to discourage speculative trading rather than restrict legitimate investment or the movement of capital.

His clarification comes amid concerns among financial market participants about the impact of tighter derivatives regulations on liquidity and trading activity. The restrictions have prompted banks to reassess their foreign exchange operations, while some market participants have reported wider bid-ask spreads and reduced activity in certain derivatives segments.

𝗥𝘂𝗽𝗲𝗲 𝗿𝗲𝗰𝗼𝘃𝗲𝗿𝘀 𝗮𝗳𝘁𝗲𝗿 𝗥𝗕𝗜 𝗺𝗲𝗮𝘀𝘂𝗿𝗲𝘀

The rupee strengthened following the latest central bank intervention, opening at approximately 95.18 against the US dollar on Tuesday compared with the previous session's close of 95.77. It subsequently surrendered some of those gains and ended the session around 95.28 per dollar.

The recovery followed a period of sustained pressure on the domestic currency amid higher international oil prices, elevated US Treasury yields and foreign capital outflows. While the RBI's measures have helped moderate immediate demand for dollars, market analysts have cautioned that the currency's medium-term performance will continue to depend on external economic conditions and the availability of foreign investment flows.

Malhotra acknowledged that India's external sector represented its principal macroeconomic challenge at present, even as domestic growth, banking sector balance sheets and corporate earnings remained relatively resilient. He expressed confidence that government initiatives, trade agreements, productivity improvements and continued investment inflows would strengthen the country's balance of payments position over time.

𝗜𝗻𝘁𝗲𝗿𝗲𝘀𝘁 𝗿𝗮𝘁𝗲 𝗽𝗼𝗹𝗶𝗰𝘆 𝗿𝗲𝗺𝗮𝗶𝗻𝘀 𝗱𝗮𝘁𝗮-𝗱𝗿𝗶𝘃𝗲𝗻

On whether interest rates could be increased specifically to defend the currency, the Governor said such decisions fell within the jurisdiction of the Monetary Policy Committee. He reiterated the distinction between monetary policy, which primarily seeks to maintain price stability, and targeted regulatory measures intended to address financial stability risks.

The RBI raised its benchmark repo rate by 25 basis points to 5.50 per cent on October 7 amid concerns over inflation and external economic pressures. Malhotra indicated that monetary policy decisions would continue to be guided principally by domestic growth and inflation conditions, while taking into account developments in international financial markets.

The Governor also maintained that banking system liquidity was manageable, estimating that approximately ₹3.5 lakh crore was immediately available with banks, compared with broader durable liquidity of around ₹10 lakh crore that included government balances.

With the rupee continuing to face external pressures, the RBI's immediate priority remains containing disorderly currency movements while preserving legitimate trade, investment and hedging activity. Malhotra's remarks indicate that further regulatory intervention remains an option if speculative pressures persist, although the central bank has not announced any additional restrictions.