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Informist, Friday, Mar. 20, 2026

 

By Aaryan Khanna and Pratiksha

 

NEW DELHI – The Reserve Bank of India is likely reducing its intervention in the foreign exchange and government bond markets as the war in West Asia drags on for the third week, according to several treasury officials operating across both markets. This has led the rupee to plunge to a record low of 93.7550 a dollar Friday, posting its biggest single day fall in over four years, while the 10-year gilt yield hit its highest level so far in 2025-26 (Apr-Mar).

 

The gradual hands-off mode of the central bank is in stark contrast to the first two weeks of the war between the US-Israel on one side and Iran on the other, after the former bombed Tehran on Feb. 28 and assassinated its top leader. Since the start of the conflict on Feb. 28 till last week, the market estimates the RBI's dollar sales in the spot market totalled $15 billion to $20 billion, leading to an orderly slide of the rupee to record lows. On Friday, chaos took hold once again as the domestic currency fell 108 paise against the greenback to a record closing low of 93.71 a dollar, charting its worst day since Russia's invasion of Ukraine in February 2022.

 

The central bank's government bond purchases went hand-in-hand with the foreign exchange intervention, with the RBI seen replenishing the rupee liquidity its forex intervention drained while also keeping yields in check. It infused liquidity of INR 572 billion through secondary market purchases of bonds in the week to Mar. 6, a weekly record for on-screen open market operations, following it up with INR 195 billion of purchases outside auction in the Mar. 13 week. The RBI also bought gilts worth INR 1 trillion through two open market operation auctions in the week to Mar. 13, largely mopping up the liquidity impact of its intervention in the foreign exchange market. The lack of intervention this week pushed the 10-year benchmark 6.48%, 2035 bond's yield to 6.7792% Friday, its highest since January 2025.

 

"From the size of the intervention, it seemed like the RBI was trying to prevent any impact on the markets if the war was short-lived," a treasury official at a large state-owned bank said. "Now, there seems to be a realisation that the war is going on longer than what maybe their base case was. So, the RBI is allowing markets to move in line with fundamentals like crude."

 

Traders have been tracking the RBI's forex market intervention with an eagle eye. On Tuesday, the RBI's rupee defence was seen as robust with plenty of dollar sales through public sector banks, dealers said. That narrative softened on Wednesday, with the central bank's dollar sales tapering off. On Friday, the central bank was not heard at all in the foreign exchange market as the domestic unit tumbled. Its secondary market activity in government bonds has also been non-existent this week, barring a speculated spurt of purchases in the latter half of trade Friday, dealers said.

 

"The prevailing geopolitical tensions have strengthened the US dollar against other currencies. The Indian rupee's (INR) depreciation mirrors that of India's export competitors, driven primarily by external events and their impact on crude prices," said Sameer Karyatt, managing director and head of trading at DBS Bank India. He expects the RBI intervention to keep the volatility of the rupee in check without targeting a level, in line with the central bank's stated aim.

 

"The INR was expected to depreciate to the 93–94 range as the conflict escalated. If the conflict persists, we anticipate the rupee's depreciating trend to continue," Karyatt said.

 

Materially, global circumstances have continued to strain domestic markets. The dollar index strengthened to an over nine-month high of 100.54 last week, which was another blow to the domestic currency. The RBI likely could not and did not want to protect the rupee any further by draining its foreign exchange reserves, dealers said.

 

India's foreign exchange reserves were around $710 billion on Mar. 13, over $20 billion lower from its record high on Feb. 27. Foreign currency assets comprised 78% of the total reserves at $556 billion. The effective buffers are even lower, with the markets speculating the RBI's net short forward positions have now ballooned to around $100 billion from $67.77 billion at the end of January. In addition to bond purchases, the central bank has relied on dollar-rupee buy-sell swaps in the secondary market to sterilise the liquidity impact of its dollar sales in the spot foreign exchange market.

 

"One has to understand that their (RBI) fundamental assessment must also be changing about the war. Things are not easing systematically," Dhiraj Nim, foreign exchange strategist at ANZ Bank India, said. "The other thing is, the foreign currency assets in the foreign exchange reserves are not as strong as the headline reserves and the forward book is also under strain."

 

Brent crude oil for May delivery, the most-traded futures contract, had risen to nearly $120 a barrel on Mar. 9, a day which saw strong RBI intervention in both markets, dealers said. Prices are now below those highs – May crude futures traded around $111 a barrel Friday. However, demand for dollars from importers has only intensified as the Strait of Hormuz remains shut and Brent crude consistently remains above $100 a barrel. The landed price of crude on India's shores is even more "alarming", as Sunidhi Securities put it – the price of the basket of crude oil India imports hit $156.29 a barrel Thursday, repeatedly smashing past previous records set in 2022 this month.

 

Traders are confident the RBI will come back into intervening in the market to cushion the rupee's fall and also signal its discomfort with gilt yields. However, the conviction of that hard-line stance seen in the first two weeks of the West Asia war is seen ebbing as the central bank now moves to assess India's macroeconomic buffers, and its own, before it is obliged to put forward its stance publicly in the Monetary Policy Committee statement on Apr. 8.

 

"The durable liquidity is at a sufficient level. From here on, the market should be able to handle keeping yields (the 10-year gilt yield) in check without too much trouble as PSU banks (state-owned banks) replace some stock," a dealer at another state-owned bank said. "Now, we only expect intervention in gilts if they (the RBI) come and protect the rupee."

 

Traders themselves are uncertain about what lies next if the central bank changes its market intervention strategy. If the conflict continues with the same intensity, market participants said they would not be surprised if the rupee falls to 95 a dollar and the 10-year gilt yield climbs to 6.85% by next week.  End

 

Edited by Ashish Shirke

 

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