RBI will take all necessary steps to curb rupee volatility, says Governor Malhotra

Reserve Bank of India (RBI) Governor Sanjay Malhotra has said the central bank is prepared to take all necessary measures to ensure orderly movements in the foreign exchange market, asserting that its recent interventions are aimed at curbing excessive speculation rather than defending any particular exchange rate for the rupee.

The governor's remarks come after the RBI introduced a series of measures to stabilise currency market conditions, including a special dollar window for state-owned oil marketing companies (OMCs), restrictions on certain foreign exchange derivative transactions and a 20 per cent reserve requirement for dollar purchases by banks.

In an interview with Moneycontrol, Malhotra said the central bank had observed excessive volatility and one-sided speculative positions that were interfering with normal market functioning. He maintained that the measures were intended to restore orderly trading conditions and ensure that foreign exchange transactions primarily served genuine commercial and hedging requirements.

𝗥𝗕𝗜 𝘁𝗮𝗿𝗴𝗲𝘁𝘀 𝘀𝗽𝗲𝗰𝘂𝗹𝗮𝘁𝗶𝘃𝗲 𝗳𝗼𝗿𝗲𝘅 𝘁𝗿𝗮𝗱𝗲𝘀

Explaining the rationale behind the regulatory changes, Malhotra said the RBI had tightened certain rules governing foreign exchange derivatives to discourage market participants from taking excessive speculative positions against the rupee.

"The purpose of these measures is primarily to ensure that there is an orderly movement of the forex market. The measures that have been taken: for example, rebooking of cancelled forex derivative contracts has been disallowed. These will also check undue speculative bets," he said.

The restrictions on rebooking cancelled derivative contracts are intended to prevent repeated transactions that could be used to build speculative positions without corresponding underlying foreign exchange requirements.

Malhotra said the RBI had also introduced a reserve requirement after observing excessive speculative positioning on the dollar-buying side of the market. Under the new framework, banks have been asked to maintain a 20 per cent reserve against dollar purchases, a move aimed at discouraging speculative demand and moderating volatility.

He added that another regulatory announcement largely involved procedural clarification concerning documentation requirements for foreign exchange transactions.

𝗦𝗽𝗲𝗰𝗶𝗮𝗹 𝗱𝗼𝗹𝗹𝗮𝗿 𝘄𝗶𝗻𝗱𝗼𝘄 𝗳𝗼𝗿 𝗼𝗶𝗹 𝗳𝗶𝗿𝗺𝘀

A significant component of the RBI's recent intervention is the creation of a special dollar window for three state-owned oil marketing companies, which are among the country's largest purchasers of foreign currency because of their substantial crude oil import requirements.

The arrangement is intended to address the dollar requirements of these companies without placing additional pressure on the regular foreign exchange market. Large purchases by oil importers can influence demand for the US currency, particularly during periods of heightened volatility.

Malhotra said the decision to establish the special window was based on an assessment of prevailing market conditions. The central bank considered the potential impact of large dollar purchases on currency movements before introducing the arrangement.

The measures come at a time when the rupee has been recovering against the US dollar, appreciating since Friday following the RBI's regulatory interventions.

𝗡𝗼 𝘀𝗽𝗲𝗰𝗶𝗳𝗶𝗰 𝘁𝗮𝗿𝗴𝗲𝘁 𝗳𝗼𝗿 𝗿𝘂𝗽𝗲𝗲

The RBI governor reiterated that the central bank does not seek to maintain the rupee at any predetermined exchange rate or within a particular trading band.

Instead, its intervention strategy is focused on preventing excessive volatility and ensuring that currency movements are determined by market fundamentals rather than speculative activity.

"We observed excessive volatility and one-sided bets that were preventing market forces from determining the rupee's true value. That is why we have taken these measures," Malhotra said.

He distinguished foreign exchange trading from equity market investment, explaining that currency markets should primarily facilitate legitimate international transactions and provide businesses with instruments to manage exchange rate risks.

"The primary purpose of our forex markets is to meet and hedge underlying foreign exchange requirements. Unlike equities, where participants can take a view on share price movements, forex markets are intended primarily for those with a genuine hedging requirement," he said.

The governor's comments indicate that the RBI's immediate priority is to discourage excessive speculative positioning while allowing normal commercial transactions and hedging activities to continue.

𝗜𝗻𝗱𝗶𝗮𝗻 𝗲𝗰𝗼𝗻𝗼𝗺𝘆 𝗿𝗲𝗺𝗮𝗶𝗻𝘀 𝗿𝗼𝗯𝘂𝘀𝘁

Beyond currency market developments, Malhotra expressed confidence in the underlying strength of the Indian economy, pointing to healthy banking sector fundamentals, improving corporate profitability and resilient household finances.

He said domestic economic growth was performing well across sectors, supported by financially sound institutions and improving business conditions.

Banks, he observed, remained well capitalised, profitable and capable of supporting continued credit growth. Their financial strength provides an important foundation for economic stability amid uncertainty in international markets.

Malhotra also pointed to early indications of an improvement in private corporate investment. He said companies were reporting stronger profitability and improving earnings growth, creating conditions that could support additional capital expenditure.

"There are initial signs of corporates investing -- they are profitable. Earnings growth is improving right now. Household balance sheets are also pretty resilient and strong. Though there is higher leverage by households, the balance sheets are pretty strong," he said.

The governor maintained that the overall macroeconomic position and the financial health of Indian institutions remained robust despite external uncertainties.

𝗚𝗲𝗼𝗽𝗼𝗹𝗶𝘁𝗶𝗰𝗮𝗹 𝗿𝗶𝘀𝗸𝘀 𝗿𝗲𝗾𝘂𝗶𝗿𝗲 𝘃𝗶𝗴𝗶𝗹𝗮𝗻𝗰𝗲

While expressing confidence in domestic fundamentals, Malhotra cautioned that evolving geopolitical developments required close monitoring because of their potential impact on the Indian economy.

Global political tensions can influence crude oil prices, international capital flows, currency markets and investor sentiment, creating risks for economies that are closely integrated with international trade and financial systems.

For India, fluctuations in global energy prices and foreign exchange conditions remain important considerations because of the country's dependence on imported crude oil and its exposure to international financial markets.

The governor indicated that the RBI would continue assessing external developments while maintaining its focus on financial stability and orderly market functioning.

His remarks underscore the central bank's approach of combining targeted intervention in foreign exchange markets with continued confidence in India's domestic economic resilience.

With the rupee showing signs of recovery following the latest measures, the RBI has made clear that its objective remains preventing disorderly market movements rather than influencing the currency towards a predetermined level.