RBI Steps Up Support for Rupee and Bonds Amid Oil Price Volatility
Central bank boosts forex intervention and bond purchases to stabilise currency, manage liquidity and curb rising borrowing costs amid Middle East tensions.
New Delhi, Mar 10: India’s central bank is expected to play a more active role in currency and bond markets as volatile crude oil prices raise concerns over inflation and fiscal pressure, analysts said.
The surge in global oil prices following the conflict involving Iran has complicated the economic outlook for India, a major energy importer. Higher energy costs risk fuelling inflation, widening the trade deficit and weakening the rupee. In response, the Reserve Bank of India (RBI) has been intervening in foreign exchange markets and increasing bond purchases to stabilise the currency and maintain liquidity.
Economists warn that prolonged instability in the Middle East could significantly affect India’s balance of payments. Upasna Bhardwaj, chief economist at Kotak Mahindra Bank Ltd, said sustained geopolitical tensions may compel the RBI to intervene more frequently in currency markets and expand bond buying beyond the estimated base level of ₹4 trillion.
Market estimates suggest the central bank may have sold between $18 billion and $20 billion in foreign exchange markets last week to support the rupee, with a large portion of the intervention occurring offshore. The RBI has also reportedly used buy-sell swaps to replenish liquidity in the banking system. India’s foreign exchange reserves stood at a record $728.5 billion at the end of February.
Despite these efforts, the rupee has weakened sharply during the current crisis, crossing the 92-per dollar mark. Analysts at Barclays, led by economist Mitul Kotecha, noted that the currency is likely to remain under pressure as geopolitical uncertainties persist.
Oil prices briefly surged close to $120 per barrel earlier this week amid fears of prolonged conflict in the Middle East. Prices later moderated after US President Donald Trump suggested the war may end soon, though crude still remains significantly higher than levels seen earlier this year.
Some experts believe the RBI may allow limited depreciation of the rupee given uncertainty surrounding the duration of the conflict. Anubhuti Sahay, head of India economic research at Standard Chartered, said the central bank could adopt a more tolerant stance toward currency weakness while carefully managing its foreign exchange reserves.
The RBI’s bond purchases are also aimed at offsetting liquidity drained by currency interventions and preventing a sharp rise in government borrowing costs. Benchmark bond yields have been climbing toward levels last seen in January 2025 and have risen by more than 10 basis points this year despite several rate cuts and substantial liquidity injections in 2025.
According to Suyash Choudhary, chief investment officer for debt at Bandhan AMC, the central bank appears to be combining currency interventions with bond purchases as part of a proactive strategy to maintain liquidity and financial stability.
Earlier this year, RBI Governor Sanjay Malhotra described India’s economic conditions as a “rare Goldilocks period” marked by low inflation and steady growth. However, the central bank had also cautioned that a 10 percent rise in crude oil prices from its projected baseline of $70 per barrel could increase inflation by about 30 basis points while reducing economic growth by roughly 15 basis points.
