RBI ready to do 'whatever is required' to curb rupee volatility: Sanjay Malhotra

The Reserve Bank of India's Governor has stated that the central bank is prepared to take all necessary steps to curb excessive volatility in the rupee excha...

What Happened

The Reserve Bank of India's Governor has stated that the central bank is prepared to take all necessary steps to curb excessive volatility in the rupee exchange rate, reinforcing the managed float framework.
The RBI has been intervening in the foreign exchange market by selling dollars — reportedly between $800 million and $2 billion daily — to moderate the pace of the rupee's depreciation against the US dollar.
The Governor clarified that the central bank's objective is to contain disruptive volatility and speculation, not to defend a specific exchange rate level or price band.
The rupee has depreciated by over 6% in 2026 against the dollar, partly driven by geopolitical pressures from the West Asia conflict that have raised global crude oil import costs.
India's foreign exchange reserves stand close to $690 billion, providing the RBI significant firepower for market interventions.
Additional policy tools under consideration include a special deposit scheme to attract non-resident inflows and a reduction in withholding tax on foreign investment in Indian debt instruments.
The policy repo rate was kept unchanged at 5.25% in the first Monetary Policy Committee (MPC) announcement for FY2026-27.

Static Topic Bridges

Managed Float Exchange Rate Regime

India follows a managed floating exchange rate system, where the rupee's value is primarily determined by demand and supply in the foreign exchange market, but the Reserve Bank of India intervenes periodically to smooth out excessive or destabilising movements. This system — sometimes called a "dirty float" — contrasts with a fully fixed rate (where the central bank pegs the currency) and a pure float (where there is no intervention at all). India formally moved to this regime in 1994 when it transitioned away from a fixed exchange rate.

Legal basis: Section 45W of the RBI Act, 1934 empowers the RBI to issue directions in the public interest in the money market; forex market operations are conducted under the Foreign Exchange Management Act (FEMA), 1999
Primary instruments: Spot market dollar sales/purchases, forward contracts, and currency swap agreements (buy-sell or sell-buy)
Sterilisation: When the RBI buys dollars (increasing rupee supply), it sterilises the liquidity impact by simultaneously conducting Open Market Operations (OMO) to withdraw rupees
Policy objective: Orderly market conditions and rupee stability — not a fixed target rate

Connection to this news: The RBI Governor's statement reaffirms the managed float doctrine — intervention is reactive to volatility, not a mechanism to set the rupee at a particular level, which is critical for maintaining India's classification as a market-determined exchange rate economy with the IMF.

Foreign Exchange Reserves and Their Management

India's foreign exchange reserves are managed by the RBI and comprise foreign currency assets (FCAs), gold, Special Drawing Rights (SDRs), and the Reserve Tranche Position (RTP) at the IMF. FCAs form the largest component. The RBI invests reserves conservatively in sovereign bonds and deposits with central banks of reserve-currency countries to ensure safety and liquidity.

Current reserves: Approximately $690 billion (May 2026)
Components: Foreign Currency Assets (largest share), Gold, SDRs, RTP at IMF
Import cover metric: Reserves equivalent to ~10-11 months of merchandise imports is considered comfortable
Reserves are used defensively — selling FCAs when rupee depreciates sharply injects dollars into the market and supports the rupee

Connection to this news: The RBI's ability to sustain daily dollar sales of $800 million to $2 billion is underpinned by the size of its reserves. The adequacy of reserves is therefore a direct determinant of the central bank's intervention capacity.

Monetary Policy Committee (MPC) and Repo Rate

The MPC is a statutory body established under the RBI Act, 1934 (amended in 2016) to set the policy repo rate in India with the primary objective of maintaining retail inflation (CPI) at 4%, within a tolerance band of ±2% (i.e., 2%–6%). The committee has six members — three from the RBI (including the Governor as Chairperson) and three external members appointed by the Central Government.

Established: 2016 (via RBI Act amendment under the Finance Act, 2017)
Inflation target: 4% CPI with ±2% band (mandated under the FRBM framework and RBI Act)
Repo rate (as of May 2026): 5.25%
MPC meets: Bi-monthly (six times a year); decisions by majority vote; Governor has casting vote in case of tie
Transmission channel: Repo rate → bank lending rates → credit growth → investment/consumption → inflation and growth

Connection to this news: With the repo rate held at 5.25% amid rising global risks and the West Asia conflict, the MPC is balancing growth support against inflation risks — a stance that also has indirect bearing on rupee attractiveness for foreign investors.

Key Facts & Data

Rupee depreciation in 2026: Over 6% against the US dollar
Rupee expected range for rest of 2026: 95–100 per US dollar
RBI daily forex market sales: Reportedly $800 million to $2 billion
India's forex reserves: Approximately $690 billion (May 2026)
Policy repo rate: 5.25% (unchanged, FY2026-27 first MPC meeting)
RBI exchange rate regime: Managed float (since 1994)
FEMA, 1999: Governing legislation for forex transactions in India
Potential supplementary tools: Special NRI deposit scheme, withholding tax reduction on debt investment