A State Bank of India report has recommended that the Reserve Bank of India should utilize its forex reserves to actively prop up the rupee amid current market volatility. According to the latest SBI report, India's forex reserves of over $700 billion are sufficiently strong to deter speculative moves and provide adequate buffer for market intervention. The report emphasizes that there is no reason to use forex reserves only for rainy days and suggests there is still time to intervene in the market if deemed necessary. This recommendation comes as the rupee has breached the 95/USD mark in intra-day trade on Monday and settled 7 paise higher at 94.78 against the American currency after Iran war escalation jolted global markets. India's foreign exchange reserves have dropped sharply, down $11.41 billion in the week ending March 20, 2026, to $698.35 billion, with gold holdings significantly decreasing, raising concerns about actual reserve adequacy despite the substantial import cover. The report notes that volatile capital flows account for 64.5% of forex reserves, highlighting the dynamic nature of India's external position.
A State Bank of India report has recommended creating a special foreign exchange window for oil marketing companies (OMCs) to help stabilize the Indian rupee amid sharp currency volatility. According to the report, OMCs need to be offered a separate mechanism by regulators that separates their daily demand of around $250-300 million from broader market activity. The report emphasizes that OMCs' annualized demand of around $75-80 billion could be taken out of regular market activity through such a window, helping reduce market pressure from large dollar purchases. As noted in the latest report, this measure would reduce the noise created by large dollar purchases and provide a clearer picture of genuine demand and supply dynamics in the foreign exchange market. The RBI is exploring various tools, including a special forex window and the continuation of 'Operation Twist,' alongside liquidity management to support the currency, with the central bank actively managing systemic liquidity through additional Variable Rate Repo (VRR) auctions. The report also suggests that the RBI could consider conducting 'Operation Twist' to manage yields, involving pushing up short-term yields while moderating long-term yields to ensure that various reference rates remain aligned with policy rates in a calibrated manner.
The report highlighted significant divergence in banking markets following RBI's efforts to rationalize banks' open positions. According to the latest SBI report, Indian banks, both public and private, are generally long onshore and short offshore, while foreign banks exhibit a contra trend. The report warns that as banks attempt to unwind their positions, liquidity shortages are likely to emerge, creating a vicious cycle where offshore premiums could witness a sharp rise. This concern is evident in recent market data, where NDF premia for 1 year shot to 4.19 per cent from 3.43 per cent, while 1-month premia spiked from 0.33 per cent to 0.67 per cent, with NDF/Offshore rates quoting at Rs 98.41. The report recommends that the USD 100 million limit should be imposed on the trading book only and not on the whole bank book level to address operational challenges. This is also important as many FPIs and some FDI players would be taking out their funds in the present situation and would be placing genuine demands on banks to fulfil on an order-matching basis. Through its circular dated March 27, 2026, the RBI capped the Net Open Position (NOP-INR) for banks at USD 100 million, with compliance required by April 10.
The report suggests that refinance or swap mechanisms could be built around this special window to ensure no immediate pressure on exchange rate movements. According to the latest report, such refinance or swap mechanisms would prevent immediate pressure on exchange rate movements and support the rupee in the near term. This measure would allow regulators to better assess the effectiveness of policy actions aimed at curbing volatility while improving transparency in the FX market. The proposal aims to provide a clearer picture of genuine demand and supply dynamics in the foreign exchange market, with the RBI maintaining the policy repo rate at 5.25% since December 2025 while conducting additional VRR auctions to address year-end pressures. The report also notes that currency and bond markets are increasingly linked, suggesting the RBI could consider tools like Operation Twist, along with liquidity measures, to support the rupee. The report emphasizes that in the current scenario, overseas channelled debt mop-up does not look desirable, citing decoupling of yields in developed markets from benchmark funding rates, which could distort borrowing costs and result in significantly high hedging costs for such exposures.
Despite currency pressures, the report emphasizes that India's external position remains strong, providing confidence in managing currency pressures. According to the latest report, India's foreign exchange reserves exceed $700 billion, covering more than 10 months of imports, while short-term debt stands at less than 20 per cent of reserves. The report notes that the present situation differs significantly from earlier episodes, such as 2013, when the exchange rate was highly volatile, and the Reserve Bank of India had introduced measures like the FCNR(B) window to stabilise the foreign exchange market. The report states that the rupee depreciation post February 27 is in fact in line with other currencies, and in fact better than currencies which appreciated significantly. Since the global shock at the end of February, however, the rupee has moved broadly in line with other currencies. Forecasts for the USD/INR pair in 2026 present a mixed picture, with some analysts anticipating a strengthening rupee - ING Bank predicting it to reach 87.00 by year-end and Bank of America forecasting 86.00 - while others suggest continued weakness - Wallet Investor forecasting the USD/INR to trend higher, potentially reaching 93.21 by the end of 2026. This split outlook highlights uncertainty over India's currency direction, heavily influenced by global economic conditions, geopolitical developments, and the effectiveness of domestic policy interventions like the proposed forex window for OMCs.
