Need, Greed, And Then RBI's Heavy Hand To Remind All Of Old Ways

RBI Governor Sanjay Malhotra shattered illusions of laissez-faire currency management with a speculated $15 billion intervention—just two days post-MPC. The central bank signalled that speculative fervour had gone too far, jolting traders who had assumed RBI was letting the rupee slide to prove it wasn’t artificially pegging the currency.

For months, the RBI had held the rupee steady through frequent interventions on both sides of the market. This unusual stability in the face of a strengthening dollar led to speculation that the central bank was quietly shifting its policy, tethering the rupee to the dollar. Critics argued that this strategy, if deliberate, was unsustainable without a structural boost to foreign capital inflows.

India appears to have taken a calculated approach to currency management, learning from the turbulence of 2013. The taper tantrum then exposed the dangers of currency volatility, as the Federal Reserve’s abrupt policy shift triggered capital flight and a sharp rupee depreciation.

To avoid a repeat, RBI may have deliberately stabilised the rupee while quietly amassing reserves against external shocks. In the process, it built a war chest exceeding $600 billion, making India the world’s fourth-largest forex reserve holder.

The central bank may have also bet that ensuring financial stability would keep foreign investors anchored. However, as India’s macroeconomic momentum softened relative to the United States, markets began to see financial stability as insufficient.

The rupee’s recent slide coincided with a change at the RBI’s helm. Since Malhotra took charge, the currency had fallen over 3.5% to an all-time low of 87.95 per dollar. The RBI began to maintain the stance of a measured overseer rather than a daily enforcer. Malhotra had reassured markets that his focus was long-term stability, not short-term fluctuations.

But when banks aggressively built long dollar positions, seemingly betting on a continued slide, the RBI struck back with heavy intervention.

The catalyst for this speculative rush was twofold. First, the RBI’s rate cut and the Fed’s assertion to hold its rate cuts for the time being encouraged dollar hoarding. Second, uncertainty over US trade tariffs amplified fears of capital outflows. Together, these factors led to a surge in speculative activity, forcing the RBI’s hand.

By aggressively selling dollars in both spot and forward markets, the RBI triggered stop-losses, forcing speculators to unwind their bets. The speculated $15 billion intervention—one of the largest in years—was a blunt reminder that while the RBI allows market-driven moves, it will not tolerate speculative excess.

The intervention wasn’t just about stability—it was about credibility. A freefalling rupee would have rattled investors, raised import costs, and complicated inflation management. The RBI reinforced its commitment to a stable, flexible exchange rate regime—one that deters speculation without imposing a rigid peg.

What happens next hinges on broader economic policy. The RBI’s intervention may have put a floor under the rupee, but the fundamental challenge remains: attracting sustained capital inflows. The upcoming Modi-Trump trade talks on tariffs could be pivotal. A favourable deal might ease pressure on the rupee. But without strong GDP growth and policy clarity, currency vulnerability will persist.

Ultimately, the RBI’s actions highlight the delicate balancing act central banks must perform. Too little intervention and markets spiral into chaos. Too much, and credibility erodes. For now, Malhotra has drawn a line in the sand. The message is clear: markets can move—but not run riot

Burning reserves to fight a tide—futile or necessary? If not now, then when?