India's central bank sells dollars directly to state oil companies as the rupee nears its record low

The Reserve Bank of India (RBI) is facing a test from oil prices, inflation and capital outflows as it defends the rupee, Mint reported. Persistent weakness against the dollar is complicating policy just as inflation approaches the top of the central bank's tolerance band. The rupee ended near 96.78 per dollar, close to the record low of 96.96 it set in May, according to a report carried by Pakistan's Business Recorder. It has fallen more than 7% against the dollar this year.

The central bank has moved from selling dollars in the open market to supplying them directly. From October 12, it is providing dollars through designated banks to Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum, so that their crude import bills no longer pass through the open market. It also cut the limit on currency positions taken without an underlying business need from $100 million to $5 million, a step aimed at speculators. Business Today reported that interventions drained about $51 billion of reserves in the four weeks to October 2. Bloomberg reported that a recent RBI rate increase fell short of what currency traders had expected.

Capital outflows are the core of the problem. Foreign investors have sold almost $30 billion of Indian equities this year. The real economy looks stronger: the International Monetary Fund (IMF) has just raised its growth forecast for the year ending March 2027 to 7%, citing domestic demand. Strong growth has not stopped portfolio money from leaving a large oil importer while crude trades above $100.