RBI should use forex reserves to prop up rupee: SBI report
The rupee breached the USD 95 mark in intraday trade on Monday and rose 7 points to settle at 94.78 (provisional) against the American currency after the escalation of the Iran war rattled global markets, increasing rupee volatility and risk aversion.
In the research report of the economic research department of the State Bank of India, it was stated that India has enough foreign exchange reserves for more than 10 months of imports. These numbers are significantly comfortable with any imagination stress.
“We believe the US$700 billion plus foreign reserves are strong enough to deter speculative movements by intervening in the foreign exchange market to support the rupee.
“As stated so far, there is no reason to suggest that we should use foreign exchange reserves only for rainy days and we believe there is still time to intervene in the market to support the rupee if desired,” the report said.
It was also stated that oil marketing companies (OMCs) should be provided with a special window by the regulator separating their daily demands (about US$ 250-300 million) from market business (annual demand of US$ 75-80 billion can be extracted).
This should provide better visibility into real foreign exchange demand and supply dynamics and enable measurement of the effectiveness of various countermeasures launched by the regulator to curb undue volatility, he added. The SBI report also said that although the initiative by the RBI to rationalize short position for banks was beneficial, it was likely to have created a significant divergence between onshore and offshore markets.
He added that Indian banks, both public and private, generally have long positions onshore and short positions offshore, while foreign banks show the opposite trend.
As banks try to unwind their positions, liquidity crunch is likely to arise, creating a vicious circle in which offshore premiums could witness a sharp rise.
Thus, 1-year NDF (non-deliverable forward) premium increased from 3.43 percent to 4.19 percent on Monday, while 1-month premium increased from 0.33 percent to 0.67 percent and NDF/Offshore rates stood at Rs 98.41.
“…we believe that the limit of US$100 million should be applied only to the trading book and not to the entire bank book, as it creates operational difficulties,” the report said.
This is also important as many FPIs and some FDI players will withdraw their funds in the current situation (reallocation/profit booking) and present genuine demands to banks to fulfill on order matching basis, he added.
The RBI, through its circular dated March 27, 2026, has capped the Net Open Position (NOP-INR) for banks at USD 100 million with required compliance by April 10.
