The Reserve Bank of India has stepped into the foreign exchange market again to support the rupee, extending a sustained intervention campaign as rising oil prices and geopolitical tensions put renewed pressure on the Indian currency.
The rupee weakened around 0.2% to 94.68 against the US dollar on Tuesday, with traders reporting that state-run banks were selling dollars near the 94.70 level, most likely on behalf of the RBI.
The intervention continues a pattern seen for at least two weeks, during which the central bank has repeatedly sold dollars to prevent sharp falls in the currency.
The RBI does not routinely announce its interventions in real time, meaning its presence in the market is generally inferred from transactions conducted by state-owned banks.
The immediate challenge is oil.
Brent crude climbed above $97 a barrel on Tuesday as tensions between the United States and Iran raised concerns about further disruption to energy supplies, particularly through the Strait of Hormuz.
For India, which imports most of the crude oil it consumes, higher energy prices can put considerable pressure on the rupee.
Indian refiners and oil companies need dollars to purchase crude from international markets. As oil prices rise, their demand for dollars increases, putting downward pressure on the rupee.
The RBI has increasingly positioned itself between those pressures and the currency.
Bankers estimate that the central bank sold at least $8 billion in the foreign exchange market last week alone, although some estimates put the figure considerably higher.
Those interventions helped the rupee recover from 95.67 per dollar on August 28 to 94.2850 on September 3, its strongest level in more than two months.
The central bank currently has considerably more room to intervene.
India's foreign exchange reserves stood at a record $740.8 billion as of August 21, while JPMorgan estimates that they may since have crossed $750 billion.
At the same time, measures introduced by the RBI to attract foreign currency have generated more than $136 billion in inflows.
These include discounted hedging facilities for overseas borrowing by state-owned companies and banks, as well as a free hedging facility allowing banks to raise foreign currency deposits abroad.
The inflows have strengthened the RBI's ability to sell dollars without placing the same degree of pressure on its reserves. The central bank's objective, however, does not necessarily appear to be defending one specific exchange rate.
Instead, its interventions have largely sought to prevent sudden or disorderly movements in the currency, particularly when global events trigger sharp demand for dollars.
That approach is being tested again by developments in the Middle East.
Oil prices have climbed as attacks on shipping and tensions involving Iran raise fears about energy flows through the Strait of Hormuz, through which a significant share of the world's oil trade passes.
Pressure is also coming from expectations surrounding US monetary policy. Markets are assessing whether the Federal Reserve could raise interest rates again, a development that could strengthen the dollar and increase pressure on emerging-market currencies.
For now, the RBI's intervention appears to be containing the rupee's decline.
The currency remains well above its record low of 96.96 reached in May, and its movements have become noticeably narrower during periods of central bank intervention.
But that stability comes with a cost. Selling dollars removes rupee liquidity from India's banking system, while prolonged intervention can reduce foreign exchange reserves.
With oil prices approaching $100 a barrel and geopolitical risks remaining elevated, the RBI's defence of the rupee may therefore be less about forcing the currency higher than preventing global turbulence from turning into a disorderly slide.
