RBI forex and liquidity measures spur rupee recovery as bond yields hit three-year high

The Reserve Bank of India's intervention in foreign exchange and money markets provided immediate strength to the rupee on Monday, even as tighter banking liquidity pushed government bond yields to a three-year high and weighed on domestic equities.

The rupee surged nearly 1% to open at 95.76 against the US dollar, gaining 97 paise from Friday's close of 96.73. The rally followed a comprehensive set of policy measures announced over the weekend designed to curb speculative currency bets and streamline foreign exchange demand.

What the RBI announced

To manage currency pressures driven by elevated global crude oil prices and foreign portfolio outflows, the RBI introduced a dedicated dollar supply window for state-run oil marketing companies, including Indian Oil Corporation, Hindustan Petroleum Corporation, and Bharat Petroleum Corporation. By fulfilling oil importers' currency requirements directly through this special facility, the central bank reduced immediate demand pressure in the spot market.

The central bank also created a Foreign Exchange Risk Reserve, requiring authorised dealers to hold a 20% cash reserve with the RBI for specified derivative contracts exceeding $2 million that hedge current account exposures. In addition, the RBI reduced the threshold for executing derivative transactions without proof of underlying exposure from $100 million to $5 million, and barred authorised dealers from allowing clients to rebook cancelled rupee-linked derivative contracts.

To manage surplus cash in the banking system, the RBI increased the daily cash reserve ratio maintenance requirement for banks from 90% to 99%, taking effect on 16 October. The central bank also announced an open market sale of government securities worth Rs 25,000 crore scheduled for Tuesday.

Rupee gains on currency curbs

The rupee emerged as one of Asia's strongest performers on Monday following the central bank's actions. While the currency remains down 6.6% so far this year amid external headwinds, market analysts noted that the decisive policy response established stability and contained depreciation risks near the 97.00 level.

The intervention follows the RBI's recent decision to raise the key policy rate by 25 basis points and adopt a stance of calibrated tightening, underlining the administration's active commitment to macroeconomic stability.

Bond yields rise to three-year high

The liquidity-tightening measures generated selling pressure in the government debt market. The yield on the benchmark 6.94% 2036 bond rose to 7.3707%, its highest level in three years, up from 7.2994% on Friday. Yields have moved higher for eight consecutive weeks, rising 54 basis points over the period as tighter banking liquidity reduced institutional buying capacity for sovereign paper.

Stock markets adjust amid global headwinds

Domestic stock markets surrendered early gains on Monday as rising bond yields and persistent foreign institutional selling influenced market sentiment. The BSE Sensex fell over 574 points to drop below 71,900, while the NSE Nifty 50 dropped nearly 150 points to 22,370. The India VIX volatility index rose more than 7% to cross 15.

Market experts noted that the structural measures introduced by the RBI demonstrate strong policy capability, insulating India's financial system against external shocks and supporting long-term economic stability.