The Indian rupee rally reached about 1% on Monday, to 95.77 per dollar from Friday's 96.73, after the Reserve Bank of India (RBI, India's central bank) curbed dollar demand and traders reported likely dollar sales, Business Recorder reported. It was the best one-day gain since April, ahead of Asian peers that mostly moved little. The steps were announced on Saturday, after the rupee neared a record low of 96.96 per dollar.
What the central bank changed
Oil companies are being steered away from the spot market, where currency is bought for immediate delivery, toward a window to buy dollars from the RBI, Business Recorder reported. Hedging rules were also tightened. Hedging means agreeing a rate for a future date. Official oil-import figures suggest the window could take about $10 billion to $12 billion of dollar buying out of the spot market each month.
The RBI barred rebooking of cancelled rupee derivatives, cut the limit for trades without a real underlying exposure, and required banks to hold 20% cash against some contracts. Importers had bought record amounts of forward dollars last month, which added to the rupee's weakness. On Monday banks grew wary of selling those hedges, and traders said state-run banks likely sold dollars to support the move.
Mitul Kotecha of Barclays said the RBI had gone from suggesting the weakness looked excessive to directly limiting dollar demand and speculation. The steps change where and when dollars are bought, not the demand from oil, trade and outflows, and he still expects an orderly fall over time. Forward premiums, the extra cost of future dollars, could rise for importers under the cash rule or fall if wholesale demand cools. Thinner liquidity, balance-sheet costs and the RBI's own forward book could push prices the other way.
Shares fell after an early bounce
The Nifty 50 fell 0.7% to 22,363.35 and the Sensex lost 0.76% to 71,924.68, Business Recorder reported. Early strength faded after a higher opening signal: GIFT Nifty futures were at 22,624.5 at 7:53 a.m. IST, versus Friday's Nifty close of 22,520.45. Both indexes had just ended their longest weekly losing run in 25 years.
Anita Gandhi of Arihant Capital Markets said sentiment "remains hostage to crude prices and a weaker monsoon", which could "intensify price pressures, weaken near-term consumption and ultimately constrain corporate earnings." Foreign selling and new share sales have pulled cash from the secondary market, she said, despite the RBI rupee support measures.
Foreign portfolio investors sold shares for 11 straight sessions, including 35.69 billion rupees on Friday, while domestic institutions bought a net 47.43 billion rupees, a pre-open report said, citing NSE data. Twelve of 16 sector indexes rose. Small-caps gained 1.4% and mid-caps 0.1%; banking fell 0.6% and information technology 0.8%.
Oil quotes differed through the day. One report said Brent fell 1.6% to $103 a barrel after US President Donald Trump said Russia and Ukraine would halt energy attacks. Another said Brent rose to $106, with Middle East tensions keeping crude high for India, the world's third-largest oil importer. A bond note put Brent near $105.
Why the rebound may not last
Government bonds were expected to ease because the RBI is draining cash from banks, with the rupee move seen as a brake on losses, Business Recorder reported. The 6.94% 2036 bond ended Friday at a 7.2994% yield, and a primary-dealership trader looked for a 7.26% to 7.32% band, since yields rise when bond prices fall. He said a rise through 7.30% had looked possible, "but the rupee measures will provide an overall calm to Indian assets." That range was an opening view, not a confirmed close.
The RBI will sell 250 billion rupees ($2.58 billion) of debt on Tuesday and tighten daily bank-reserve rules from October 16. Last week it raised its policy rate, shifted its stance to calibrated tightening and signalled more hikes. Its inflation forecast rose 20 basis points, or 0.20 percentage points, to 5.2%, and core inflation, which excludes food and fuel, to 4.4% from 4.3%. A Reuters poll expected September retail inflation, due later on Monday, at 5.4% from a year earlier.
The Indian rupee rally then drew hedging into the non-deliverable forward market, an offshore contract used to hedge the rupee, a senior trader at a foreign bank said. The flows looked tied to foreign portfolio holdings, and sales of local stocks have exceeded $30 billion so far in 2026. Foreign-exchange reserves were $734 billion on October 2, down from a September peak of $785 billion. ANZ said that unless balance-of-payments pressures ease, meaning the ledger of trade and capital flows, "gradual INR depreciation is likely to resume once their initial impact fades."
