India is spending tens of billions to defend the rupee: the oil company dollar window, new derivative curbs and what Asia can learn

How is India defending the rupee? With a mix of dollars, rules and a special lifeline for oil companies. The Reserve Bank of India announced measures on 10 October that include supplying dollars directly to three state owned oil companies, tightening limits on speculative currency derivatives and requiring a new cash reserve on some contracts, as reported by Analytics Insight. The rupee had closed at 96.73 per dollar on 9 October, close to its record low of 96.96 set in May.

The cost is rising. Economists estimate that 75 to 80 billion dollars has gone into spot dollar sales and swaps since early June, about half of a 140 billion dollar cushion the RBI built this year, according to Outlook Business. For Southeast Asian central banks facing similar pressure from oil and the dollar, India's playbook, and its price tag, are worth studying.

What the RBI announced

The centrepiece is a special dollar window for oil companies. From 12 October, the RBI began meeting the daily dollar requirements of Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation through designated banks. Because India imports large amounts of crude, these companies are among the biggest buyers of dollars, so taking their demand out of the spot market reduces pressure on the rupee.

The RBI also tightened derivatives rules. It restricted the rebooking of cancelled rupee linked foreign exchange derivative contracts, and cut the threshold for certain derivative positions without documented underlying exposure from 100 million dollars to 5 million dollars, a change that also covers exchange traded currency derivatives. The aim is to limit large speculative bets against the rupee.

A new Foreign Exchange Risk Reserve requirement applies to specified rupee linked derivative contracts above 2 million dollars, with authorised dealers required to hold a cash reserve equal to 20 percent of the transaction's rupee value. Additional documentation rules require users to confirm that another dealer has not hedged the same exposure, to prevent duplicate hedging.

Why the rupee is under pressure

The pressures will sound familiar to anyone watching Southeast Asian currencies. Costlier oil, a spike in US Treasury yields and continued selling by foreign equity investors have kept the rupee weak, according to Outlook Business. Brent crude settled near 117 dollars last week, a six month high, which increases India's import bill.

Reserves have been falling. India's foreign exchange reserves dropped 12.95 billion dollars to 734.6 billion dollars in the week ended 2 October, the fourth consecutive weekly decline, leaving them around 51 billion dollars below September's record high. That is still a large buffer, but the pace of decline shows the cost of defending the currency.

Every central bank can defend its currency for a while. The question is whether it is buying time for the pressure to pass or spending reserves against a tide.

The RBI has also signalled broader vigilance. Its governor said he is open to using interest rates to curb financial risks, and the bank announced new leverage rules for banks from 1 April 2027, according to reports. India's repo rate stands at 5.50 percent.

What Southeast Asia can learn

Several Southeast Asian central banks face the same mix of high oil prices, a strong dollar and foreign outflows. The Philippine peso hit its 31st record low of the year last week, and Bank Indonesia is defending the rupiah near 18,000 per dollar with hedging incentives and a higher deposit rate, as we covered in our report on Bank Indonesia's quiet tightening.

India's approach shows the options available. A dedicated dollar window for oil importers removes the largest source of dollar demand from the market. Tighter derivative rules reduce speculation. Reserve requirements on contracts raise the cost of betting against the currency. But each tool has costs, from drawing down reserves to making hedging harder for legitimate businesses. The main tools in India's playbook include:

• A direct dollar supply window for state oil importers
• Lower thresholds for derivative positions without underlying exposure
• Limits on rebooking cancelled currency contracts
• A cash reserve requirement on large rupee linked derivatives
• Spot dollar sales and swaps funded from reserves

The risks of a long defence

Defending a currency against fundamental pressure can be expensive. If oil stays high and the Fed remains hawkish, the RBI may have to keep spending reserves or accept further depreciation. A former RBI official warned that using the rupee as a stabiliser can hurt the real economy, according to reports, reflecting debate over how hard to resist.

Tighter derivative rules can also have side effects. Exporters, importers and foreign investors who need to hedge legitimate exposures may find it harder or more expensive, potentially discouraging investment.

The coming weeks will be decisive. The Fed's decision on 28 October, oil prices and foreign portfolio flows will determine whether India's measures are enough to stabilise the rupee or whether more reserves, or a weaker currency, will be needed.

India's rupee defence combines direct dollar support for oil importers, tighter derivative rules and heavy use of reserves. The measures can buy time, but their cost is rising as oil stays high and the dollar stays strong. For Southeast Asian central banks facing the same pressures, India offers a clear playbook, and a reminder that reserves are finite.