The Reserve Bank of India's foreign exchange intervention has reached unprecedented levels, with net annual currency intervention averaging about $60 billion over the last 10 years, representing 2% of gross domestic product. During FY21 and FY22, when India's balance of payments generated surpluses, the RBI net purchased $157 billion, effectively putting a floor on the exchange rate. In contrast, the RBI sold a significant $118 billion in FY25, helping restrict the rise in USD/INR from 83.50 to 85.50. Between April 2025 and February 2026, the RBI sold another $37 billion, with USD/INR moving up to 91. Following the Iran war outbreak, the RBI sold a further $37 billion in March 2026 alone, with USD/INR eventually ending the month around 93.50. Such interventions were not necessarily incorrect, but when sustained at this scale and over such timeframes, they inevitably influence currency levels, not just volatility.
When the central bank controls the dollar/rupee exchange rate, immediate beneficiaries include firms engaged in international trade who receive subsidised currency-risk management. However, as reported by Business Standard, there are significant fiscal costs involved. The Market Stabilisation Scheme previously imposed direct interest costs for currency policy implementation on the exchequer. Current currency interventions through foreign currency non-resident bank deposits create fiscal burdens, while future losses on currency hedges reduce government dividends from the Reserve Bank of India. When the dollar/rupee moves by ₹10 on a $50 billion position, this induces costs of half a trillion rupees to the seller of the financial derivative.
India's interest-rate policy extends beyond the MPC setting the repo rate, with the RBI also intervening in bond markets and modulating banking liquidity to facilitate monetary-policy transmission. During FY26, India's net government debt across central and state government bonds and Treasury bills grew by ₹17.8 trillion. About ₹10.6 trillion was net purchased by banks, insurers, and pension and provident funds with regulatory obligations to buy such bonds, while the RBI's own holdings net increased by the remaining ₹7.2 trillion, accounting for a substantial 40% of the incremental government debt. The RBI's large bond purchases and liquidity operations helped keep rupee-denominated interest rates below levels that might otherwise have been required to attract discretionary savings. The benchmark 10-year India-United States government bond spread consequently averaged just 235 basis points during FY26, a multi-year low.
The RBI's significant intervention in interest rates may have contributed to external pressures, necessitating intervention there as well. During FY25 and FY26, the RBI net sold $192 billion. The cumulative current account deficit together with net foreign direct investment and foreign portfolio investment flows accounted for only $75 billion of this demand. The remainder likely reflected dollar demand from hedging and speculative positioning. Low headline fixed-income returns, exacerbated by taxation, pushed discretionary savings away from debt and into domestic equities, causing pockets of overvaluation there. Low interest-rate differentials also compressed USD/INR forward premia, making it cheaper to hedge and speculate against the rupee, likely deterring net foreign investments and incentivising outflows.
Several inflation-targeting central banks, including the European Central Bank, the Reserve Bank of Australia, the Bank of England, and the Bank of Japan consider global monetary and financial conditions, interest-rate differentials and exchange rates while assessing monetary-policy choices. This neither dilutes the primacy of domestic monetary objectives nor implies targeting exchange rates. The distinction is particularly relevant for RBI actions outside the MPC. Under its current statutory mandate, the MPC must set the policy rate to achieve the inflation target, while large RBI interventions outside the MPC, across liquidity, government bonds and FX, should explicitly consider their impact on interest-rate differentials, capital flows and exchange rates. An FX framework cannot involve mechanical rules, but broad principles could outline when large-scale intervention may be warranted, and how its interaction with monetary conditions and capital flows is assessed. As noted by Business Standard, large-scale interventions call for clarity on what the central bank is trying to achieve and how its tools interact, without such coherence, policy can appear active but become harder for markets to read.
The controlled rupee environment breeds moral hazard as firms take more unhedged foreign-exchange exposure, building systemic risk. As reported by Business Standard, parts of the private sector devote resources to gathering intelligence about target exchange rates to extract value from government price control. This misallocation of intellectual resources undermines Indian growth, which maximises when firms focus on customers, technology, and management rather than government arbitrage. The transition away from price controls represents a milestone in economic history, requiring similar maturity in understanding exchange-rate management costs for broader economic growth strategy.
