India's boldest exchange rate policy in years has failed.

Ask AI · Why the RBI’s new rules couldn’t provide a lasting boost to the rupee exchange rate

India rolled out the most aggressive measures in more than a decade to curb speculation in the foreign-exchange market, but the impact was only fleeting. The rupee’s initial rise quickly faded, reflecting the enormous challenge the Reserve Bank of India faces in supporting an Asian currency with among the weakest performances.

After the Monday open, the Indian rupee against the U.S. dollar briefly surged 1.4%, but then quickly retreated to just a 0.3% gain. Last Friday, the RBI announced new rules setting a limit on banks’ outstanding positions held in onshore and offshore FX markets at $100 million at the end of each trading day, aiming to force them to cut positions.

The move highlights a decline in the RBI’s flexibility: measures it took to defend the rupee after the Iran conflict erupted caused foreign-exchange reserves to drop sharply over the first three weeks of March. The measure was immediately met with pushback. Banks warned that closing out a total of at least $30 billion could lead to large losses. Citing people familiar with the matter, Bloomberg reported that banks have asked that the rule apply only to newly opened positions.

IFA Global founder Abhishek Goenka said, “Banks are running large-scale arbitrage trades—shorting the U.S. dollar in the offshore market and going long the U.S. dollar in the onshore market.” Because the RBI’s restrictions apply only to onshore positions, banks are forced to reduce these bets, which requires them to sell dollars locally, he said.

However, given that oil prices remain elevated, Monday’s move is unlikely to change the overall outlook. Because India relies heavily on energy imports, it is one of the countries hit hardest by the Iran war and rising commodity prices. Last Friday, the Indian rupee fell below the closely watched 94 level, hitting a new low.

Finrex Treasury Advisors treasury head Anil Kumar Bhansali said the rupee has given back most of Monday’s gains because oil importers need dollars.

Brent crude is well above $110 per barrel—and also far higher than the $70 per barrel benchmark set by the RBI in October. According to Bloomberg Economics Research, if crude reaches $100 per barrel, natural-gas prices would be 50% higher than pre-war levels, and India’s import spending would increase by $5 billion per month.

Systematix Institutional Equities analyst Siddharth Rajpurohit said in a note that the RBI’s move may help the rupee in the short term, “but history shows that the impact of such measures is limited.” “If crude prices stay around $100 per barrel, the pressure could persist,” the report also warned, adding that the firm’s target exchange rate of 100 “may soon be shown to be wrong.”