The Reserve Bank of India (RBI) is steering its interventions in the foreign exchange market through discreet directives delivered to dedicated traders in soundproof rooms. These orders vary in focus, sometimes emphasizing volume—such as selling $100 million per minute—and at other times dictating market levels, like selling until a certain target is reached. On some occasions, the instruction may simply be to refrain from trading altogether.
This unpredictability signals the RBI’s high-stakes strategy to manage the rupee as it struggles against historic lows. Insights from bankers, traders, and former RBI officials—speaking on the condition of anonymity—indicate that this uncertain intervention approach likely means continued market volatility, with instances of abrupt swings whenever the central bank acts.
RBI Governor Sanjay Malhotra’s objective is to mitigate speculative pressure on the persistently weak currency while avoiding the aggressive interventions that marked the tenure of his predecessor. Striking a balance is challenging; insufficient interventions could escalate one-sided bets and worsen the rupee’s decline, while excessive action could drain liquidity from the banking sector and diminish economic growth or foreign reserves.
“Malhotra seems willing to adopt a leaning-against-the-wind strategy,” remarked Eswar Prasad, a former head of the IMF’s China division, now an economics professor at Cornell University. “The approach is to intervene as needed, limiting short-term volatility without fully resisting market forces.”
As of 2025, the rupee has depreciated by 4.9% against the dollar, placing it among the top decliners among major currencies, only surpassed by the Turkish lira and Argentina’s peso. This decline occurs amidst a backdrop of a weakening dollar, which has dropped in value by over 7%.
Factors contributing to the rupee’s weakness include a growing trade deficit, steep U.S. tariffs on Indian imports, and foreign investment outflows, compounded by stalled negotiations with Washington. Historically reticent about discussing market interventions, RBI officials have become more transparent over recent years. Governor Malhotra has frequently addressed the necessity of such interventions to manage volatility.
Decisions regarding market interventions are made every morning before trading begins at the RBI’s Mumbai headquarters by the Financial Markets Committee, which assesses various pressures impacting the exchange rate. If required, this committee may convene multiple times a day, with final decisions resting with the governor.
Following an affirmative decision, senior dealers at major state-run banks receive the orders, executed from confidential offices equipped with unmonitored phone lines. The RBI keeps the specifics of its orders confidential, ensuring that traders remain unaware of the total amount being traded. To further complicate predictability, the central bank occasionally opts for non-round figures, ceasing transactions unexpectedly, such as at $217 million. Should officials perceive a discernable pattern in interventions, strategies may shift abruptly.
Participating banks, including private institutions, cannot take proprietary positions during these interventions. Their role is limited to closing existing positions and managing client flows. When a senior trader signals a halt, the directive applies to all other traders. The financial returns from these transactions are minimal, as the RBI compensates banks only enough to cover costs.
Interventions in the currency market have been integral to India’s financial management, given its historical challenges with rupee depreciation. Past crises, such as the balance of payments crisis in 1991, forced the government to pledge gold for essential imports as reserves dwindled. The 2013 rupee turmoil during the U.S. taper tantrum prompted successive RBI governors to build substantial foreign reserves, which stood at $686 billion as of November 28, encompassing approximately $557 billion in currency holdings and $106 billion in gold—sufficient to cover nearly 11 months of imports.
“India has faced significant depreciation episodes in the past amidst low reserves,” stated R. Gurumurthy, a former central bank official who managed the currency desk. He declined to provide insights into operational specifics but noted that the evolving approach reflects a mandate to ensure confidence, buoyed by the growing reserves.
Under Malhotra, a Princeton graduate and RBI governor for about a year, the central bank has embraced a more nuanced intervention strategy. The IMF responded positively, recently reclassifying India’s exchange rate management from “floating” to “crawl-like,” indicating a move from stringent control to a more flexible framework.
Former RBI executive director G. Mahalingam indicated that minimizing market speculation is a primary goal. “There will always be speculators, but if they enter the market with uncertainty about RBI actions, they are less likely to act aggressively,” he noted.
Given India’s partial currency convertibility owing to capital regulations, RBI interventions encompass actions in both domestic and international markets. The rupee is primarily traded through non-deliverable forwards (NDFs)—derivative contracts that fix exchange rates in dollars. The RBI collaborates with the Bank for International Settlements, working with large banks in international markets operating around the clock in cities like Singapore, Dubai, and London.
In recent months, cumulative interventions have led to a reduction of foreign currency assets by approximately $38 billion from this year’s zenith in June, simultaneously draining liquidity in the banking system. On December 8, Malhotra announced intentions to ease liquidity by purchasing bonds and conducting foreign-exchange swaps worth $16 billion.
The central bank seems more tolerant of currency depreciation, with net sales averaging $1.2 billion per week in recent weeks, compared to a previous average of $3.5 billion. Yet, Malhotra emphasized during a press briefing that the RBI does not target specific price levels but seeks to minimize undue volatility.
The RBI’s room for further intervention may be restricted after increasing dollar sales positions. As of October, its net short dollar book reached about $64 billion. Officials might be exercising caution in anticipation of the need for decisive actions later.
“There is a clear threshold for intervention,” suggested Jamal Mecklai, managing director of Mecklai Financial Services Pvt and a veteran of India’s currency markets. “They are currently constrained by issues related to liquidity and reserves.”
Anticipation of a favorable resolution to trade negotiations with the U.S. may offer some relief for the rupee. A delegation from the Trump administration, led by Deputy U.S. Trade Representative Rick Switzer, plans to visit India to advance discussions on a potential trade agreement.
Malhotra has expressed optimism about forthcoming trade discussions, asserting that a positive outcome could alleviate pressure on the rupee. For now, however, the currency faces ongoing strain, having dipped below the significant level of 90, now half of its value from 2011. This challenge persists as Malhotra and RBI officials attempt to balance currency flexibility with maintaining market stability and preventing past crises from re-emerging.
“The battle continues,” Mecklai commented, reflecting the underlying sentiment that persistent depreciation may loom large in market perceptions.
