Forex reserves at a 3-year low
The immediate trigger for the rupee’s sharpest slide in recent memory was a stark revelation: India’s forex reserves, excluding gold, now cover just 8.7 months of imports — the lowest level recorded in the past three years. Naveen Mathur, Director of Commodities, Currencies, and International Business at Anand Rathi Share and Stock Brokers, confirmed the alarming development in an exclusive conversation with ET Now.
“The RBI intervention in the currency market to shield the rupee is really weighing on the nation’s foreign exchange reserves,” said Mathur, pointing out the difficult position the central bank finds itself in. While India still holds a significant overall reserve buffer, the consistent drawdown to prop up the rupee is creating a visible strain on the country’s import coverage capacity.
The double threat: Crude oil and a surging dollar
Mathur identified two critical factors that investors and policymakers must monitor closely in the weeks ahead.
The first is crude oil. With WTI crude hovering near or above $100 per barrel, India — which imports approximately 85% of its oil requirements — faces a mounting import bill that directly widens the current account deficit. “If the crude is around $100 or plus $100, then the sentiments would be negative for rupee because of our imports and the import bill which would impact the current account deficit,” Mathur explained.
The second threat is the rallying US dollar. The Dollar Index — which measures the greenback’s strength against a basket of major global currencies — has climbed sharply from around 95.55 a year ago to nearly 100, touching 99.597 at the time of the conversation. A stronger dollar exerts downward pressure on most emerging market currencies, and the rupee is no exception.
“The dollar index appreciation is also a factor which is creating pressure on the rupee against the currency,” Mathur noted, underscoring how global monetary dynamics are compounding India’s domestic challenges.
Is RBI doing enough?
The central bank’s interventions — selling dollars from reserves to buy rupees and stabilize the exchange rate — have provided some short-term relief but have come at a cost. The declining import cover ratio is a direct consequence of this strategy. Market participants are now questioning whether the RBI needs to deploy additional tools, such as tightening liquidity conditions, raising interest rates more aggressively, or pursuing emergency swap lines with other central banks.
Mathur’s comments suggest the market believes current measures, while necessary, may not be sufficient if the external shocks — elevated crude and a strong dollar — persist.
What lies ahead for the rupee?
The outlook remains fragile. If geopolitical tensions keep oil prices elevated and the US Federal Reserve continues its hawkish monetary policy stance — which has been a key driver of dollar strength globally — the rupee could face further depreciation pressure in the near to medium term.
For Indian businesses, especially those with significant import dependencies or foreign currency-denominated debt, the current environment warrants urgent hedging strategies. For retail investors, currency volatility of this magnitude typically signals broader risk-off sentiment in equity and bond markets.
The RBI, for its part, faces a classic policy dilemma: defend the rupee at the cost of reserves, or allow some depreciation to preserve the import buffer. How it navigates this tightrope in the coming weeks could define India’s macroeconomic stability for the rest of the year.