Reserve Bank of India Raises Borrowing Costs to Stabilize Rupee

The Reserve Bank of India is employing a combination of liquidity restrictions and regulatory hurdles to stabilize the Indian rupee after the currency hit an all-time low of 96.96 in May 2026. Most recently, overnight borrowing costs in India have risen above the central bank's policy rate as the banking system's liquidity surplus plummeted from 11 trillion rupees last month to just over 500 billion rupees.

While the central bank has conducted short-term liquidity operations, the injections have remained moderate. Market analysis indicates the bank is intentionally keeping fund costs elevated to make betting against the rupee more expensive. This follows a broader strategy to curb speculation, including the introduction of a 20 per cent cash reserve requirement on forex derivatives over $2 million and a reduction in the limit for derivative transactions without underlying exposure from $100 million to $5 million.

To further bolster the currency, the bank launched a dollar-rupee swap window that raised $143.6 billion and spent approximately $80 billion since June. Despite these measures, the rupee remains under pressure from high crude oil prices and nearly $5 billion in foreign equity outflows during October. Governor Sanjay Malhotra and Finance Minister Nirmala Sitharaman have stated that the priority is maintaining market stability rather than defending a specific exchange rate.