Currency Under Pressure: How RBI’s $5 Billion Intervention Signals a Strategic Shift in India’s Forex Policy

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Rupee Under Watch: How RBI’s Currency Strategy Could Influence Your Next Trade

India’s currency markets saw a decisive move in early August 2025. The Reserve Bank of India (RBI) stepped in with a $5 billion intervention to arrest the rupee’s sharp slide against the dollar. While such actions are not new, the scale, timing, and offshore execution suggest a more proactive stance. For traders and investors, the message is clear — currency policy is becoming an active lever in managing market sentiment, liquidity flows, and inflation risks.

Current Position of Indian Currency

The Indian rupee’s fall to ₹87.89/USD in early August 2025 marks a sharp 3% depreciation from July levels, driven primarily by geopolitical and trade disruptions. The immediate trigger was the Trump administration’s imposition of a 50% tariff on Indian exports, doubling the earlier 25% rate as retaliation for India’s continued imports of Russian oi l. This move hit key export sectors, such as pharmaceuticals, textiles, and auto components, where the US accounts for nearly 18% of India’s outbound trade.

Simultaneously, foreign portfolio investors (FPIs) pulled out over $2 billion from equities in July, compounding rupee pressure . For equity traders, this FPI withdrawal also hints at possible near-term volatility in sectors sensitive to currency moves, such as IT and export-oriented manufacturing.

Despite a weakening dollar index globally, the rupee underperformed regional peers, reflecting India-specific vulnerabilities. Analysts warn that if trade tensions persist, GDP growth could fall below 6%, with a potential drag of 40–50 basis points.

RBI’s Intervention to Deal With Currency Under Pressure

The RBI deployed a multi-pronged strategy to arrest rupee volatility. It sold over $5 billion in USD across both onshore spot markets and offshore non-deliverable forwards (NDFs). The NDF market, typically used for currencies with capital controls, allowed the RBI to influence rupee expectations without directly affecting domestic liquidity or reserves. Intervention timing was tactical, often just before the 9:00 AM IST opening of domestic markets, to preempt speculative positioning.

This “light-touch” approach contrasts with past heavy-handed tactics and reflects a calibrated use of offshore tools to guide a rupee trajectory. The RBI’s NDF book reportedly reached short positions of $60–70 billion, marking a significant offshore footpr int.

Such large-scale dollar sales may stabilise the rupee in the short term. Still, they also deplete forex reserves, which limits the RBI’s capacity to cushion future shocks, especially if prolonged weakness fuels imported inflation:

Reserve Impact

India’s forex reserves fell by $9.3 billion to $688.9 billion in the week ending August 1, marking the steepest weekly drop in eight months. Of this, $6.9 billion was attributed to spot dollar sales, while $2.1 billion stemmed from valuation losses due to dollar strength.

Foreign currency assets, the largest reserve component, declined by $7.3 billion , and gold reserves fell by $1.7 billion. This depletion underscores the RBI’s aggressive defence of the rupee and reflects the cost of maintaining currency stability amid external shocks. Despite the fall, reserves still cover over 11 months of imports , offering a buffer against further volatility.

For long-term investors, the reserves-to-imports ratio still offers comfort, but sustained drawdowns could impact India’s macro stability narrative—a factor to watch when assessing market risk premiums.

Inflation Risk

A weaker rupee amplifies imported inflation, particularly in energy, electronics, and pharmaceuticals. With Russian oil accounting for 35–40% of India’s crude imports, any shift to pricier alternatives under US pressure could raise the annual import bill by $9–11 billion. This would feed into consumer prices, especially if global commodity prices rebound.

RBI’s inflation forecast for FY26 was revised down to 3.1%, but analysts caution that second-round effects from tariffs and rupee depreciation could reverse this trend. If inflation rises, the RBI’s room for further rate cuts narrows, potentially stalling India’s recovery momentum.

Trade-offs and Risks of RBI Intervention

Every intervention carries costs. Using reserves reduces the buffer available for other shocks and can be costly if the dollar’s strength persists. Large sales may also affect domestic liquidity, requiring the RBI to manage money markets carefully so that interest rates and credit flows do not tighten unintentionally. Finally, market participants may recalibrate expectations: if the central bank is seen as prepared to defend the rupee repeatedly, traders might test the limit; if it is seen as intervening only occasionally, the market may price in larger future swings.

To judge whether this is a one-off response or a sustained strategic shift, watch four things: weekly forex reserves and the pattern of reserve changes; RBI statements or minutes that clarify its FX stance; the use and size of non-spot tools (swaps, options); and the rupee’s forward curve and NDF rates. For active traders, these signals can offer early clues to the RBI’s stance and potential market direction.

Conclusion

The RBI’s reported $5 billion of dollar sales in August 2025 is not simply a technical adjustment; it reflects a pragmatic, active approach to managing currency risk. For traders and investors, this could mean a more visible RBI hand in currency markets—affecting export sector earnings, rate expectations, and short-term market sentiment. That balance between defence and flexibility is likely to shape India’s forex policy through the near term as external shocks and trade tensions continue to test currencies worldwide.