India’s central bank may need to revisit strategies from the 2013 taper tantrum and previous balance-of-payments crises to effectively defend the declining rupee. The Reserve Bank of India (RBI), under Governor Sanjay Malhotra, is contemplating various measures to stabilize the currency, including raising interest rates, undertaking additional currency swaps, and finding ways to attract dollars from international investors, Bloomberg News reported on Thursday.
The urgency of these measures has intensified, as the rupee plummeted to a record low of nearly 97 per dollar this week. This decline has significantly increased import costs and further diminished investor confidence. The RBI’s immediate focus is to halt any further depreciation of the rupee.
“It’s important to avoid a self-fulfilling spiral, where a weaker rupee encourages more hedging, increasing pressure on the currency, and spurring further hedging,” stated Sajjid Chinoy, an economist at JPMorgan Chase Bank. “Capital augmentation is needed to break the cycle and, if done, it should be on a scale sufficient to alter expectations in the foreign exchange market.”
India encountered a similar challenge in 2013, when the Federal Reserve indicated it would begin tapering its quantitative easing program, leading to capital outflows from emerging markets and causing the rupee to weaken from approximately 55 per dollar in May to nearly 69 by August. At that time, the RBI, led by Governor D. Subbarao, responded by tightening liquidity and increasing the marginal standing facility rate by 200 basis points. Although these measures temporarily slowed the rupee’s decline, the currency continued to weaken until newly appointed Governor Raghuram Rajan rolled out a foreign-currency non-resident deposit program, which successfully mobilized over $30 billion.
Economists suggest the RBI may now need to consider a similar approach, such as encouraging banks to issue offshore bonds. While India has historically not issued sovereign foreign-currency debt, State Bank of India raised significant amounts—over $4 billion in 1998 and $5.5 billion in 2000—through overseas bond issuances to enhance financing after U.S. sanctions following India’s nuclear tests.
However, any plan for deposits or bond issuance could incur substantial costs, especially as global interest rates have risen sharply. In 2013, banks offered deposit rates between 3.5% and 5%, but they may now need to provide rates of at least 8% to 9% to attract funds, noted Madhavi Arora, an economist at Emkay Global Financial Services Ltd. Bankers in recent discussions with the RBI have advocated for subsidized swap rates to make these deposits more feasible.
“A combination of measures, such as limiting import demand and incentivizing dollar inflows through tools like rate hikes, can help disrupt the negative feedback loop between market expectations and the rupee’s depreciation pace,” remarked Anubhuti Sahay, an economist at Standard Chartered Plc.
Nonetheless, the risk remains that using higher interest rates to defend the rupee could have wider economic repercussions while providing only limited relief for the currency. “It did not work in 2013; it will not work now,” warned Arora.
Ultimately, attracting and retaining stable capital inflows presents a more significant challenge. Investors have divested from Indian stocks this year, with foreign portfolio outflows in 2026 already eclipsing last year’s record of $19 billion. Preventing this reduction in capital flows will necessitate “structural reforms, which remain the critical test,” stated Sahay of Standard Chartered.
