The rupee remains Asia’s worst-performing currency this year, hit by weak investment flows, high US tariffs and the absence of a US trade deal. Despite the RBI’s efforts to stabilize the market, analysts believe the rupee faces significant downside risks. | Photo credit: istock.com
Excessive moves in the futures market have intensified over the past week as the glut of dollars collided with regulatory and balance sheet constraints, leading to a spike in premiums.
About half a dozen bankers said central bank intervention will be needed to ease the pressure.
The forward premium for one-month dollar/rupee rose to 55 paisa on Tuesday, the highest level in more than six years and more than three times the level it was at in late November.
The rupee remains Asia’s worst-performing currency this year, hit by weak investment flows, high US tariffs and the absence of a US trade deal. Despite the RBI’s efforts to stabilize the market, analysts believe the rupee faces significant downside risks.
A source familiar with the matter said the issue was raised informally with the RBI last week, while another source confirmed that the central bank is aware of the situation and is closely monitoring markets.
Both declined to be identified because they are not authorized to speak publicly. The RBI did not immediately respond to a request for comment.
DOLLAR GLUT
Banks can usually manage excess dollar liquidity by placing deposits with other lenders. However, regulatory restrictions at the end of the quarter, especially at the end of the calendar year, limit this opportunity.
This forces banks to switch to sell/buy swaps in dollars and rupees, increasing premiums, especially at shorter tenors.
Tanay Dalal, an economist at Axis Bank, noted that rising premiums in the NDF market are adding to the pressure.
Offshore prices indicate expectations that the rupee will weaken back below 90 in a short period of time, Dalal said. The rupee hit a record low of 91.075 earlier this month but recovered after aggressive RBI intervention.
Bankers also pointed out that recent sales of dollars in the RBI’s spot market have added to the liquidity surplus.
Demand from importers and speculative participants is concentrated in the futures market, while the RBI’s dollar sales took place in the spot market, resulting in a supply-demand mismatch across maturities.
CALL FOR INTERVENTION
Market participants said the central bank should take measures such as draining dollar liquidity through buy/sell swaps.
“Continued auctioning of buy/sell swaps by the RBI could have the triple benefit of lowering premiums, reducing pressure on MIFOR (a swap benchmark) and domestic swaps, and allowing (RBI’s) forward short positions to be better diversified over time,” Dalal said.
Bankers and economists have warned that RBI intervention may be needed to normalize dollar liquidity, highlighting the competing priorities of curbing rupee volatility and monetary policy transmission that the central bank faces.
“The broader point is that, despite RBI intervention, the market is convinced that the INR must weaken significantly in the absence of a US trade deal,” said Dhiraj Nim, economist and currency strategist at ANZ.
Published on December 23, 2025
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