The rupee staged a sharp rebound on Monday, strengthening below the Rs 94 mark against the US dollar after , offering some relief to currency markets.
The rupee rose nearly 1% to around 93.85 in early trade, recovering from an all-time low of 94.84 touched on Friday.
The biggest trigger behind the sudden recovery is a decisive intervention by the Reserve Bank of India (RBI).
The central bank has directed banks to cap their net open foreign exchange positions at $100 million by the end of each trading day. This effectively forces banks to reduce large bets on the dollar.
In simple terms, banks that were holding excess dollars now have to sell them to comply with the new rule. This leads to a surge in dollar supply in the market, which in turn strengthens the rupee.
These positions were built as arbitrage trades between onshore and offshore markets, and their unwinding is now driving the sharp move in the currency.
The RBI’s move has triggered what traders call “unwinding” or short-covering.
Banks and traders who had bet on a weaker rupee are now rushing to exit those positions. This creates heavy dollar selling pressure, pushing the rupee higher in a short span of time.
Market participants estimate that these positions could be worth tens of billions of dollars, which explains the speed and scale of the rebound.
Despite the sharp recovery, the broader outlook for the rupee remains uncertain.
The currency has been under pressure due to a combination of factors: rising crude oil prices, strong dollar globally, and heavy foreign investor outflows. In March alone, the rupee has fallen over 4%, marking its worst monthly performance in years.
India’s heavy dependence on oil imports makes the rupee particularly sensitive to crude prices. When oil rises, the country needs more dollars to pay for imports, which weakens the currency.
The rupee’s rebound is largely technical and driven by RBI’s intervention rather than a fundamental shift in underlying pressures.
While the near-term move offers relief, volatility is likely to remain high. Much will depend on how long crude oil prices stay elevated and whether global risk sentiment improves.
The RBI may have halted the slide, but the rupee’s fate still hinges on crude oil and global money flows amid the ongoing war in West Asia.