Forex Reserves Are Bleeding. Can RBI Stop Rupee From Hitting 100 in 2026-27?

As reserves fall 50 percent of FCNR(B) inflows, will dollar window and FERR curb slide, asks Subhash Chandra Garg.

As the banks lose interest on FERR amount, their cost for providing the hedges goes up, which they will recover from the customers and buyers, making the hedging much costlier than earlier. 

(Photo: Aroop Mishra/The Quint)

Net inflows under non-resident deposits rose sharply to $119.2 billion during April-August 2026, taking total foreign exchange reserves to a high of $785.71 billion on 4 September. Foreign currency assets (FCAs)—the usable component of reserves, excluding gold, Special Drawing Rights (SDRs), and the reserve position in the IMF—rose to $648.17 billion.

The forex reserves had climbed by more than $120 billion since June when the Reserve Bank of India (RBI) launched the special Foreign Currency Non-Resident Bank (FCNR-B) deposits scheme. This came at the cost of India paying unusually high interest rates, while the RBI assumed all foreign exchange depreciation risk.

The forex reserves have been declining sharply since then. On 9 October, barely in a month, the reserves declined to $726.03 billion, down by $59.68 billion (50 percent of net FCNR-B inflows). The FCAs declined by $51.12 billion to $597.61 billion. Half of the reserves built-up is gone in a third of its collection time (June-August 2026).

This massive running down of the forex reserves must have jolted the RBI. It seems to have panicked. 

On 10 October, it decided to establish a special dollar window for public sector oil market companies (OMCs) to take out their demand from the forex market. It severely restricted forex hedging and introduced a new measure—foreign exchange risk reserve (FERR)—to mandate the authorised dealers/banks to keep 20 percent of the Indian rupee equivalent of foreign exchange derivative contracts, making hedging much costlier. Some other measures were also taken.

What kind of panic measures has the RBI taken? Will these arrest the free fall of the foreign currency reserves and stabilise the rupee? What more will the RBI do? 

RBI Measures

The RBI Governor released a statement on 7 October after the Monetary Policy Committee meeting in which he sounded confident: “India’s foreign exchange reserves continue to remain adequate in terms of standard metrics of reserve adequacy“. He added that the RBI remained “committed to ensuring orderly adjustments to the exchange rate.”

Just three days later, however, the RBI had to announce a slew of measures that unambiguously conveyed that the loss of $60 billion of reserves in a month had alarmed the apex bank, forcing it into crisis-management mode.

The RBI announced that the existing threshold of $100 million equivalent for undertaking foreign exchange derivative transactions to hedge contracted exposures, without establishing the existence of an underlying exposure, would be reduced to $5 million equivalent (in any currency or rupee) across all authorised dealers/banks. 

This meant that the importers, foreign investors, businesses borrowing in foreign currencies, and others would be able to undertake general hedging (buy protection against likely rupee depreciation) only up to $5 million in the entire system. 

For the actual underlying exposures, the hedgers will have to establish the existence of real exposures to the authorised banks before they would sell hedging/derivative protection to them. The hedge buyers will also have to provide an undertaking to them that they had not hedged the same underlying exposure with any other dealer.

The RBI also mandated that all authorised dealers would have to maintain an FERR with the RBI in cash, equal to 20 percent of the rupee equivalent of the notional amount of each foreign exchange derivative/hedging contract exceeding $2 million, where the user purchases foreign currency against the rupee. 

The FERR, like the cash reserve ratio, will earn no interest from the RBI. 

As the banks lose interest on the FERR amount, their cost for providing the hedges goes up, which they will recover from the customers and buyers, making the hedging much costlier than earlier.   

The sharp reduction in the limits for hedged transactions and the additional cost of hedging could lead to the cancellation of many derivative contracts. The RBI has barred authorised dealers from rebooking cancelled derivative contracts. The measures announced to discourage hedging of foreign exchange exposures is a major reversal of the RBI’s longstanding stance of mandating hedging as a prudential measure. 

The RBI also undertook another measure, which has been resorted to in the past only in situations when the forex reserves are considered vulnerable (for example, in 2013, during the massive taper tantrum crisis). 

The RBI has opened a "special window to meet the entire daily dollar requirements" of the public OMCs. Under the facility, the RBI will sell required US dollars to the OMCs from its reserves through designated banks. 

The private sector oil companies, like Reliance, would continue to source their requirement from the forex market. The OMCs will get it directly from the RBI. 

The OMCs’ drawdown from the RBI is expected to amount to $10-12 billion every month. This will not alter the country’s overall demand-supply gap for foreign exchange, but it will change demand-supply dynamics in the spot foreign exchange market.

Will These Measures Work?

The RBI had two clear objectives for the measures announced on 10 October:

• First, arrest free fall of foreign exchange reserves

• Second, stabilise the rupee

Foreign exchange reserves data is currently available only up to 9 October 2026. The RBI must have taken into account the loss of $60 billion in a month, reflected in the 9 October figures, when it announced the stringent measures the following day.

There were several reasons for the steep decline in reserves.

The foreign portfolio investors (FPIs) have been relentlessly selling from around 20 September. Older FCNR-B and NRE deposits could have also been encashed as these yielded much lower dollar interest, whereas a good part of the $120 billions of FCNR-B deposits received were highly leveraged. 

The FPIs continue to sell, although the pace has eased somewhat. With oil prices rising sharply and remaining around $100 per barrel, the demand on foreign exchange reserves to finance oil purchases remains elevated. There has also been no turnaround in foreign direct investment (FDI) inflows, although transactions involving IDBI Bank could bring in $5-6 billion.

It seems that the foreign exchange reserves will remain under pressure in foreseeable future with the weekly hemorrhage around $5-6 billion. At this speed, all FCNR-B deposits induced increase in foreign exchange reserves would be gone by the November-December 2026. 

The RBI’s measures and its active sales of foreign exchange reserves to OMCs and in the market have helped the rupee recover from Rs 96.78 to the dollar on 9 October. On Monday, 12 October, it strengthened to Rs 95.78 to the dollar; followed by Rs 95.29 on 13 October; Rs 95.16 on 14 October; and Rs 95.06 on 15 October. It closed below Rs 95 at Rs 94.97 to the dollar, on Friday, 16 October.

There is considerable unease among businesses—including importers, foreign investors, foreign currency borrowers and banks active in the foreign exchange and derivatives markets—about their inability to hedge their exposures fully.

It is not usually possible to have all the documentation for the underlying exposures for forex needs during the course of the year and incoming year (for which the operators tend to buy hedging protection) and its rising cost. 

There is also serious concern at much lower effective/usable forex reserves (about $137 billion are in unusable gold, SDRs etc) rapidly expanding forex swap liabilities of the RBI (dollars purchased now to be sold at pre-agreed rate at a future date) estimated at over $100 billion and the exposure which the RBI has taken for FCNR-B deposits and other obligations. 

The rupee strengthening by about 2 to dollar (from Rs 96.78 to Rs 94.97) over a week’s time is likely to be temporary. The underlying anxieties, dynamics, and vulnerabilities are likely to ensure that the rupee does not appreciate any more and starts depreciating again. 

Crossing Rs 100 to a dollar in 2026-27 remains the most likely case. 

Can the RBI Do More?

The RBI has used most conventional and unconventional measures to build reserves and arrest the rupee’s decline.

One measure commonly employed by central banks, and usually quite effective, is raising domestic interest rates to create a favourable interest-rate differential over prevailing US dollar interest rates. This interest-rate defence makes inflows of foreign currency more attractive and outflows less attractive.

This, however, presents a Hobson’s choice for the RBI. 

Raising domestic interest rates further would discourage consumers from taking loans to purchase durable goods and housing. It could also adversely affect business and industrial investment, with serious consequences for economic growth.

There has been some creeping increase in domestic interest rates (10-year bonds have touched 7.4 percent). The RBI might raise interest rates in next two-three meetings, but it would be relatively mild. 

The government and other agencies may be forced to take additional measures. 

The Securities and Exchange Board of India (SEBI) is discouraging investment in gold exchange-traded funds (ETFs). Banks are being asked to reduce gold imports. Power companies are not being allowed to import coal despite domestic shortages. These appear to be early signs of further intervention.

Both foreign exchange reserves and the rupee are likely to remain under pressure.

(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of books such as 'The $10 Trillion Dream Dented, 'We Also Make Policy', and 'Explanation and Commentary on Budget 2025-26'. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)