Rupee gains 145 paise in two trading sessions, but disquiet sets in forex market
4 min read
[Key Takeaways:
- The Indian rupee surged to a five-week high of 95.28 per US dollar, gaining 49 paise, driven by tighter RBI regulations and reduced speculative activity.
- The Reserve Bank of India imposed new margin requirements, including the Foreign Exchange Risk Reserve (FERR), increasing operational costs for banks engaging in forex derivatives.
- Market participants expressed concerns over restricted liquidity and heightened compliance burdens, potentially affecting treasury operations and long-term currency stability.
Currency Response to Regulatory Measures
On Tuesday, the Indian rupee ended at a five-week high, gaining 49 paise to close at 95.28 per US dollar, compared with the previous close of 95.77. This movement followed a 145-paise boost in the last two trading sessions after the Reserve Bank of India (RBI) announced measures aimed at curbing speculation and volatility in the forex market.
The rupee appreciated by approximately 50 paise on Tuesday, primarily due to limited buyer activity. The spot bid/ask spread widened to around 20 paise during morning trades but normalized to two to three paise by evening.
“If participants buy dollars, they may need to enter into forward transactions or swaps, which could attract additional margin/reserve requirements under the latest measures. This is restricting market activity,” said a senior dealer with a public sector bank.
Impact on Banking Operations
The RBI on Monday directed authorized dealers (ADs) to maintain a Foreign Exchange Risk Reserve (FERR) equivalent to 20% of the rupee value of notional amounts for forex derivative contracts used for hedging their own assets and liabilities.
“As per the latest circular, banks are required to maintain margins on their own positions, including those taken to hedge assets and liabilities. Banks already maintain FERR on forex-related customer transactions. Applying similar requirements to their proprietary books will significantly increase costs,” noted a treasury official with a private sector bank.
These measures form part of broader efforts announced over the weekend, including restrictions on rebooking cancelled derivative contracts, lowering the threshold for unsolicited forex derivative transactions from $100 million to $5 million, and enhanced documentation norms for underlying exposures.
Market Analysis and Outlook
Finance Minister Nirmala Sitharaman acknowledged recent rupee depreciation and emphasized the RBI’s commitment to stabilizing the currency through measured interventions.
Dilip Parmar, Senior Research Analyst at HDFC Securities, observed that the rupee’s upward trajectory over three consecutive sessions was driven by regulatory tightening, unwinding of long positions, global dollar weakness, lower crude oil prices, and domestic equity market recovery.
Parmar added, “The spot USD/INR has support at 95.00. A sustained move below this level opens potential toward 94.50, though external macroeconomic pressures may temper further gains.”
Liquidity and Fixed-Income Markets
The yield on the 10-year Government Security closed slightly lower at 7.37%, compared to the previous close of 7.39%. Kunal Sodhani, Head of Treasury at Shinhan Bank, stated, “RBI has absorbed liquidity with its recent actions. Over the next two to three days, 10-year yields are likely to range between 7.2% and 7.4%.”
He cautioned that while short-term volatility might ease, sustained long-term stability depends on alignment with global market conditions.
RBI Intervention Mechanisms
The RBI also introduced a special mechanism to meet the total daily dollar需求 of three public sector oil marketing companies—Indian Oil Corporation, Hindustan Petroleum Corporation, and Bharat Petroleum Corporation—aimed at smoothing demand-driven fluctuations in the forex market.
Published on October 13, 2026
FAQs
What triggered the recent appreciation of the Indian rupee?
The rupee gained momentum following RBI’s regulatory measures targeting speculative trading and forex volatility, coupled with weaker dollar sentiment and easing crude oil prices.
What is the Foreign Exchange Risk Reserve (FERR)?
FERR requires authorized dealers to hold reserves equal to 20% of the rupee value of derivative contracts undertaken for hedging their own forex exposures, maintained daily with the RBI until contract maturity.
How have banks reacted to the new forex regulations?
Banks report increased compliance costs and operational complexity, particularly regarding proprietary forex positions, raising concerns over efficiency in treasury management.
What are the implications for Indian financial markets?
Short-term impacts include tighter liquidity and elevated bond yields, while long-term effects hinge on global economic trends and effectiveness of RBI’s intervention framework.
Will the RBI’s measures ensure sustained currency stability?
While effective in addressing immediate volatility, experts note that lasting stability will require coordination with broader macroeconomic policies amid evolving global dynamics.
