India’s central bank is reinforcing its capacity to defend the rupee amid global uncertainties, as foreign exchange (FX) reserves climb toward record highs and the Reserve Bank of India (RBI) trims its short-dollar forward book. These moves are being seen as crucial in providing a stronger buffer against potential currency volatility sparked by upcoming international trade developments and geopolitical tensions.
The country’s FX reserves, which had dipped to around \$624 billion in late January 2025, are expected to cross the \$700 billion mark based on the latest RBI data due for release on July 4. This increase has been driven by a combination of spot dollar purchases by the central bank and positive valuation effects.
Simultaneously, the RBI’s forward dollar book has seen a notable reduction. After reaching a peak of \$88.7 billion in February, the forward book was reduced to approximately \$65.2 billion by the end of May. A leaner forward position reduces the burden of future dollar outflows, allowing the RBI to act more freely in the spot market if required.
The rupee has shown signs of recovery, gaining around 2.5 percent since hitting a record low of 87.95 against the US dollar in February. It is currently trading at around 85.6 to 85.7, indicating improved market confidence and currency stability. Analysts believe that the RBI is now in a stronger position to manage any potential fallout from global risks, such as possible US tariff changes anticipated around July 9.
Under the leadership of Governor Sanjay Malhotra, the RBI has adopted a lighter approach to market intervention, allowing more natural fluctuations in the rupee’s value. This policy shift has encouraged Indian corporations to take on greater responsibility for hedging their foreign exchange exposures. Companies, particularly those in the export sector, are increasing their use of forward contracts to manage currency risk. For example, diamond exporter Hari Krishna Exports has raised its hedging coverage from 60-70 percent to as much as 90 percent.
Alongside foreign exchange market reforms, the RBI is also closely monitoring liquidity conditions. In late June, it conducted a ₹1 trillion reverse repo auction to address excess liquidity and ensure short-term interest rates remained within the policy corridor.
India’s banking sector also reflects prudent financial behavior. HDFC Bank, the country’s largest private lender, reported a 1.8 percent rise in deposits compared to a 0.4 percent increase in loans for the first quarter, suggesting cautious credit expansion.
As the global financial environment remains tense, particularly with the upcoming decisions on US trade tariffs, India’s monetary authorities appear better equipped to weather potential disruptions. The combination of strong FX reserves, a reduced forward book, and a shift toward market-based currency risk management offers a more resilient shield for the rupee in the months ahead.