RBI should use forex reserves to support rupee amid volatility:SBI

India’s largest lender State Bank of India (SBI) has recommended that the Reserve Bank of India (RBI) consider deploying its foreign exchange reserves to stabilise the rupee, which has come under pressure amid global market turbulence triggered by the ongoing West Asia conflict.The Indian currency slipped to an all-time low, breaching the 95-per-dollar mark in intra-day trade on Monday, reflecting heightened risk-off sentiment across global markets. It later recovered marginally to settle at 94.78 against the US dollar, but volatility remained elevated.
Strong Forex Buffer Supports Intervention
In its latest ‘Eco Wrap’ report, SBI Research noted that India’s external position remains robust, with forex reserves exceeding $700 billion—enough to cover more than 10 months of imports. This, it said, provides ample firepower for the central bank to intervene in the currency market.“The reserves are sufficiently strong to deter speculative moves and support the rupee. There is no reason to reserve their use only for extreme situations,” the report said, suggesting that timely intervention could help curb excessive volatility.
Oil Demand Window to Ease Market Pressure
The report also proposed the creation of a separate forex window for oil marketing companies (OMCs), whose daily dollar demand is estimated at $250–300 million. Ring-fencing such demand could improve transparency in the forex market and allow better assessment of genuine supply-demand dynamics.
Onshore-Offshore Divergence Raises Concerns
SBI flagged a growing divergence between onshore and offshore currency markets, partly due to recent regulatory measures. Domestic banks typically hold long positions onshore and short positions offshore, while foreign banks mirror the opposite trend.As these positions unwind, liquidity constraints could emerge, potentially pushing offshore premiums higher. This trend was already visible, with one-year non-deliverable forward (NDF) premiums jumping sharply to 4.19 per cent.
NOP Limits May Pose Operational Challenges
The report also raised concerns over the RBI’s recent move to cap banks’ Net Open Position (NOP-INR) at $100 million, effective April 10. It suggested that the limit should apply only to trading books rather than entire balance sheets, warning that broader restrictions could create operational hurdles.
FPI Outflows Could Add Pressure
Adding to the concerns, SBI expressed concern that ongoing geopolitical uncertainty may trigger outflows from foreign portfolio investors and some foreign direct investors. Such movements would increase demand for dollars, further pressuring the rupee.With global headwinds intensifying, the report underscores the need for calibrated intervention by the RBI to maintain currency stability while ensuring orderly market conditions.

(Business Correspondent)