RBI forex curbs: Malhotra flags $700bn shield (2026)

What the RBI governor is signalling

Reserve Bank of India Governor Sanjay Malhotra said the central bank will do “whatever is required” to ensure orderly price discovery in the foreign exchange market. He reiterated that the RBI does not target any specific rupee level or band, and that markets are allowed to find the price level. But he added that if “undue speculation” builds up, it becomes the central bank’s duty to quell it. The governor’s comments came amid questions on the RBI’s currency market interventions and the tightening steps introduced from late March. He also pointed to the RBI’s “sufficient” foreign exchange reserves, which he described as “$100 billion or so,” as part of its toolkit.

“Orderly price discovery” and why it matters

Malhotra framed the RBI’s approach around keeping exchange rate adjustments orderly and non-disruptive to economic activity. The central bank’s focus, as described, is on preventing abnormal or high volatility rather than directing the rupee to a desired price. He said the RBI has “enough tools in our kit” and would use “all instruments” to ensure smooth exchange rate adjustment that reinforces financial stability. In this context, the RBI positions intervention as a stabilisation tool used when volatility becomes excessive. The governor also referenced that such intervention is acknowledged as a legitimate tool by the International Monetary Fund (IMF) in its integrated policy framework of 2020.

What triggered the recent tightening since late March

The RBI’s actions followed a period of heightened volatility in the foreign exchange market in the last few weeks of March, according to Malhotra. He said the central bank observed positions being built up, contributing to excessive volatility and not helping efficient price discovery. The RBI also noted linkages between the non-deliverable forward (NDF) market and the onshore forwards market, and that in normal times these linkages aid price discovery. But when positions build up in a way that amplifies volatility, the RBI said it steps in with targeted measures. Malhotra described the intent as cooling off that phase, while keeping longer-term commitments intact.

Key measures announced and the timeline

Since late March, the RBI has rolled out multiple steps aimed at curbing speculative positioning in rupee-linked products and tightening risk limits. These included a cap on banks’ net open positions (NOP) in the domestic market and curbs around rebooking of certain derivative contracts. The measures also covered tighter norms for related-party transactions. Separately, the RBI barred authorised dealers from offering non-deliverable forwards, which are widely used offshore rupee instruments.

Why the RBI says the curbs are temporary

A key reassurance from Malhotra was that the measures should be seen as reactions to specific market movements and “not, in any sense, signalling any structural change.” He said the RBI’s endeavour has been to widen and broaden the foreign exchange markets and that the steps are “not going to remain forever.” The central bank plans to review these measures at an appropriate time depending on market conditions. This framing is aimed at separating short-term volatility management from the RBI’s longer-term market development objectives.

The RBI’s stance on not targeting a rupee level

Malhotra reiterated that the exchange rate policy remains unchanged and that exchange rates are market determined. Interventions, he said, are used to smooth excessive and disruptive volatility without targeting any specific level or price band. He also flagged the risk of “self-fulfilling expectations” exaggerating currency movements beyond what is warranted by fundamentals, and said the RBI would contain such disruptive volatility judiciously. This communication is consistent with the RBI’s repeated positioning that it is not defending a number, but managing the pace and disorderliness of moves.

Tools cited by the RBI: reserves and regulation

The governor cited two broad types of tools. First is intervention using reserves, for which he pointed to “$100 billion or so” in forex reserves as sufficient to curb undue speculation and reduce abnormal or high volatility. Second are regulatory measures aimed at market behaviour, such as limiting net open positions and tightening derivative-related rules. Malhotra said intervention is sometimes undertaken for the purpose of ensuring smooth adjustment and that the IMF’s 2020 framework recognises such use in certain circumstances.

What the RBI said about the rupee’s valuation

In an interview referenced in the coverage, Malhotra said the rupee is not overvalued and may, in fact, be undervalued after its recent depreciation against the dollar. The statement is notable because it signals the central bank’s comfort with the rupee’s broad level while it focuses on controlling undue speculation and disorderly price action. It also aligns with his messaging that the RBI is not trying to peg the rupee, but is willing to act when volatility becomes disruptive.

Market and investor relevance

For market participants, the immediate implication is tighter room for speculative positioning when volatility rises, especially through bank NOPs and certain derivative strategies. For companies and traders using hedges, the tightened approach to rebooking cancelled forex derivative contracts reduces the ability to re-enter the same trade to benefit from price movements under a hedging label. For investors, the RBI’s emphasis on temporary, reaction-based measures is intended to reduce uncertainty around longer-term market structure. And for the broader economy, the RBI’s messaging links currency stability to avoiding disruption to economic activity and supporting financial stability.

Policy context: interest rate decision referenced

The comments were reported around the post-policy briefing where the RBI held the repo rate at 5.25%. While the governor’s remarks focused on the foreign exchange market, the setting matters because it is one of the main forums where the central bank clarifies how it balances policy priorities and market stability. The RBI’s repeated stress that it will act against “undue speculation” indicates that volatility management remains a live concern even when broader policy settings are unchanged.

Conclusion

Malhotra’s core message is that the RBI will allow the rupee to be market determined, but will step in with interventions and targeted rules if speculation drives abnormal volatility. He also sought to reassure markets that the post-March curbs are temporary responses, not a structural shift. The RBI has pointed to ample reserves of about $100 billion and a broad toolkit to ensure orderly price discovery. The next signal for markets will be the RBI’s review of these measures, which Malhotra said would depend on market conditions.