Explained: Why has the rupee bounced back, and can the rally last?

The Indian rupee strengthened nearly 1% against the US dollar on Monday, October 12, opening at ₹95.76 after closing at ₹96.73 on Friday. The recovery followed a series of measures announced by the Reserve Bank of India (RBI) to contain volatility in the foreign-exchange market and ease pressure on the domestic currency.

Despite the rebound, the rupee remains down 6.6% so far in 2026. The intervention raises a larger question: can regulatory restrictions ease the currency's weakness when underlying demand for dollars remains elevated?

Why has the rupee been under pressure?

Two factors have contributed to the currency's weakness: India's oil import requirements and rising demand for dollars from companies seeking protection against further depreciation.

Higher crude oil prices increase the dollar payments required by oil marketing companies. Meanwhile, importers have stepped up forward-dollar purchases to lock in exchange rates for future payments. Expectations of further rupee depreciation pushed such purchases to record levels the last few months, as per industry trackers.

This can create a cycle in which fears of a weaker rupee drive additional dollar demand, adding to pressure on the currency.

What has the RBI changed, and how will it work?

The RBI has opened a special dollar window from October 12 to meet the daily foreign-currency requirements of Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL). The facility operates through designated banks and will remain in place until further notice, shifting these companies' dollar purchases away from the spot market.

The central bank has also barred the rebooking of cancelled rupee-linked foreign-exchange derivative contracts and lowered the threshold for specified transactions without underlying exposure from $100 million to $5 million.

Additionally, the RBI has introduced a Foreign Exchange Risk Reserve (FERR), requiring authorised dealers to maintain a cash reserve with the central bank equal to 20% of the rupee-equivalent notional amount of eligible rupee-linked derivative contracts exceeding $2 million. The requirement applies to specified contracts used to hedge current-account exposures where users purchase foreign currency against the rupee.

Which companies stand to benefit, and who could face pressure?

Oil marketing companies gain a dedicated dollar-supply channel, while importers may face higher hedging costs. A sustained rupee recovery could ease imported-input costs but reduce exporters' currency advantage.

Can the rupee sustain its recovery?

A certain section of economists expects an initial appreciation followed by consolidation, cautioning that the RBI's measures raise the cost of betting on rupee depreciation without resolving underlying balance-of-payments pressures.

Regulatory restrictions can influence trading behaviour, but they cannot independently resolve external pressures associated with oil imports and other dollar payments. The sustainability of the recovery will depend on whether dollar demand moderates and broader external conditions, including crude oil prices and capital flows, become more supportive of the domestic currency.