The rupee's defence is turning into a hedging-cost problem for importers2, 1. Three signals on 27 October pointed the same way1, 4, 3. Reserves are being drawn down, a large dollar repayment is coming, and a bank trade that had held forward premiums down is stalling2, 1, 4, 3.
Former RBI governor Raghuram Rajan told Reuters' Global Markets Forum that India should not spend reserves defending a particular level for the currency4. Uday Kotak, founder of Kotak Mahindra Bank, said India must prepare to repay $160 billion to $170 billion of FCNR(B) deposits, including interest, over the next three to five years3. Deutsche Bank, in a report covered by Mint, forecast 100 basis points of RBI tightening by the first half of 20271. That would take the repo rate to 6.25%, and the bank expects the rupee weaker than 97 to the dollar during 20271.
A day earlier, The Economic Times reported that some large banks had pulled back from interbank buy-sell swaps after what three people described as "feelers" from the RBI. The central bank did not confirm this; ET said emails and text messages to an RBI spokesperson went unanswered2. ET also reported that a senior private-sector bank official said the regulator may not object to such swaps if the dollars are lent to companies as trade finance2.
The spot rate, and the forecast
The European Central Bank reference rate was 95.18 on 26 October, up from 94.47 on 21 October5. BusinessLine's forex page showed the rupee at 95.12 on 27 October, up 3 paise6. ET's forex page quoted 95.19757.
Deutsche Bank said RBI measures "helped the currency recover to around ₹94.50 against the US dollar"1. The reference rate was 94.47 on 21 October5, so the two broadly line up. The currency has still lost about 6% in 2026 and hit a record low of 96.96 in May4. Deutsche Bank said reserves have fallen by about $60 billion from a peak of $786 billion in early September1.
It expects the rupee to weaken beyond 97 during 2027 if the global environment does not improve1. That is a forecast, not a market level.
The swap trade, and a new reserve
A forward premium is the amount by which the forward dollar rate exceeds the spot rate2. An importer buying dollars forward pays it; a bank selling dollars forward receives it. With the one-year premium above 4.5% and US Treasury bill yields near 4.4%, banks that bought dollars in the spot market and sold them forward earned a gross return close to 9%2.
That trade did two things. It gave banks a return on rupee liquidity created by the FCNR(B) inflows. It also added forward dollar selling, which softens premiums and lowers hedging costs for importers, a senior private-sector bank official told ET2.
RBI actions also pushed the premium the other way. The central bank ran sell-buy swaps, selling dollars to absorb rupees and buying dollars forward, and a banker said this contributed to the higher forward premium2. So the premium has been pulled in two directions.
ET reported that the one-year premium had eased on 26 October2. There is no published evidence yet of a jump in premiums after banks stepped back. The effect is likely to be one way. With fewer banks selling dollars forward, there is less downward pressure on premiums, so hedging may cost more2.
A second cost is already in the rulebook. RBI FAQs published on 15 October set out how the 20% Foreign Exchange Risk Reserve works8. It applies to rupee-linked derivatives where a user buys foreign currency against the rupee to hedge a current account payment above $2 million8. The reserve earns no interest, must be held daily and does not count as a high-quality liquid asset8. The RBI did not say how much this would change what customers pay8. Importers should ask their banks how it is being priced.
The FCNR(B) wall
The RBI opened a special dollar-rupee swap on 8 June and closed the FCNR(B) window on 31 August3. Banks mobilised $132.98 billion of FCNR(B) deposits by 31 August; including overseas foreign currency borrowings and external commercial borrowings, scheme inflows reached $143.6 billion by 18 September3.
The figures measure different things. The $132.98 billion is the deposit stock raised under the facility3. Kotak's $160 billion to $170 billion is the repayment obligation including interest, spread over three to five years3. Rajan's "over $140 billion" refers to money raised through the year's special measures, of which about half has been used to support the rupee and absorb surplus banking system liquidity4.
Under the swap, the RBI absorbed the cost of hedging the currency risk on the principal amount2. "We don't need to panic today, but we must be strategic about how we build India's economic and financial structure for the time that will inevitably come," Kotak said3. Rajan argued the other way on reserves: "It would be a shame if that was quickly spent in defending a level, which historically we haven't done"4.
Why it reaches the purchase order
Wholesale price inflation was 11.39% in September, with fuel and power at 25.85% and crude petroleum and natural gas at 57.32%9. Retail inflation was 5.54%9. Deutsche Bank said wholesale inflation above 11% could push higher input costs on to consumers1. A weaker rupee raises the rupee cost of the same dollar invoice.
For a buyer, the choice is between a known cost and an unknown one. A forward contract fixes the premium and the rate; leaving exposure open leaves both to the market. The one-year premium was above 4.5% and the rupee is forecast to weaken past 97 next year2, 1. Importers with machinery, components or edible oil orders may want to stagger cover across tenors rather than take a single view.
Contracts matter too. A dollar invoice without an FX clause puts the whole currency move on the Indian buyer. A clause that shares movement beyond an agreed band, or that shortens price validity, splits the risk. The $2 million threshold for the new reserve applies to each contract, so check each hedge separately; the RBI has also told banks to watch for deals structured to stay under the limit8.