The Reserve Bank of India sold a net $18.2 billion in October, its highest monthly intervention in 2026, to defend the rupee. Despite this record defence and over $130 billion in Foreign Currency Non-Resident (Bank) deposit inflows, the currency remains weak, closing at 95.12. The pressure persists because the RBI's actions are colliding with a lucrative bank arbitrage trade that had provided a buffer.
Large Indian banks had used the rupee liquidity from FCNR(B) inflows to execute buy-sell swaps, buying dollars spot to invest in US Treasury bills yielding close to 9% and selling them forward. This carry trade generated a gross return while creating onshore dollar supply. The RBI has signalled discomfort with this practice, viewing it as a diversion of domestic liquidity. In response, banks have shelved or unwound these positions.
The forced unwind has two direct consequences. First, it removes a source of dollar supply from the local market, offsetting the supportive effect of the FCNR(B) inflows and keeping spot rupee pressure alive. Second, it tightens forward market liquidity. Banks buying dollars to unwind positions, coupled with importers seeking cover, have driven the one-year dollar-rupee forward premium sharply higher to 396.12 paise.
Higher forward premia translate directly into increased hedging costs for Indian companies with foreign currency obligations. The pain is most acute for import-heavy sectors like oil refining. India's crude basket price has topped $120 a barrel, and a weak rupee further swells the import bill, squeezing refiners' margins. This liquidity squeeze arrives ahead of a larger structural challenge: repayments on the FCNR(B) deposits, including interest, are estimated at $160-170 billion and will come due in the next three to five years.