Malhotra says RBI’s FX Steps Tactical, Not Structural

The recent measures in the foreign exchange market were targeted responses to specific episodes of volatility rather than structural shifts, RBI Governor Sanjay Malhotra said today, seeking to draw a clear line between intervention and intent at a time when the rupee has been under sustained pressure.

His remarks come after a period in which the currency has been buffeted by tariff-related disruptions, geopolitical tensions and a sharp surge in crude prices following disruptions around the Strait of Hormuz. The rupee has weakened about 10% over 2025–26, with a particularly sharp slide in March pushing it to a record low near 95 per dollar, before a slew of measures by the central bank.

The central bank forced an unwinding of an estimated $30 billion to $40 billion in arbitrage trades by tightening banks’ positions in both onshore and offshore forward markets and capping net open exposures. The impact was immediate. Banks scrambled to square positions, and the rupee rebounded more than 2% over the last three trading sessions.

Yet, even as markets read the moves as a decisive tightening of the operating environment, Malhotra was careful to frame them differently. These were not changes to the structure of the market, he said, but interventions aimed at restoring order where price discovery had begun to fray. The broader commitment to a market-determined exchange rate and gradual internationalisation of the rupee remains intact.

Deputy Governor T. Rabi Sankar reinforced this reading, describing the episode as one where arbitrage-driven trades had distorted local pricing and artificially tightened market supply. The measures, he said, were designed to moderate such activity without impairing genuine hedging demand or altering the longer-term trajectory of market development.

RBI noted that underlying external sector data points to emerging imbalances. Merchandise exports have weakened, with contractions seen across key destinations such as the US, Netherlands, and the UK. At the same time, imports have surged at a faster pace, largely due to elevated gold demand, leading to a widening trade deficit. This divergence has increased pressure on the current account, even as it remains broadly manageable.

Malhotra’s emphasis on preventing “self-fulfilling expectations” offers a glimpse into the central bank’s current playbook. Sharp currency moves, if left unchecked, risk feeding into inflation, capital flow volatility and broader economic sentiment. 

For now, the message is calibrated. The tools may be forceful, but the intent, the RBI insists, is temporary.