India's Central Bank May Need 2013 Playbook to Defend Rupee

India’s central bank may need to draw on its 2013 taper tantrum playbook and earlier balance-of-payments crises to mount an effective defense of the beleaguered rupee.

The Reserve Bank of India under Governor Sanjay Malhotra is considering a range of measures to stabilize the currency, including raising interest rates, additional currency swaps and steps to raise dollars from overseas investors, Bloomberg News reported Thursday.

The urgency has grown after the rupee slumped to a record low of nearly 97 per dollar this week, driving up import costs and further eroding investors’ confidence. The RBI’s immediate priority: arrest further depreciation.

“It’s important to avoid a self-fulfilling spiral, where a weaker rupee encourages more hedging, which puts more pressure on the currency and encourages even more hedging,” said Sajjid Chinoy, India economist at JPMorgan Chase Bank. “Capital augmentation is needed to break the cycle and, if done, it should be done in scale to alter expectations in the FX market.”

India faced a similar crisis in 2013 when the Federal Reserve signaled it would begin tapering quantitative easing, triggering capital outflows across emerging markets that saw the rupee weaken from about 55 per dollar in May that year to almost 69 by August.

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The RBI, then led by Governor D. Subbarao, responded by tightening liquidity and raising the marginal standing facility rate by 200 basis points. Those measures briefly slowed the rupee’s slide, but the currency continued to weaken until newly appointed Governor Raghuram Rajan unveiled a foreign-currency non-resident deposit program in September that mobilized more than $30 billion.

Economists say the RBI may now have to consider a similar strategy, including encouraging banks to issue overseas bonds. While India has never sold sovereign foreign-currency debt, State Bank of India raised more than $4 billion and $5.5 billion through overseas bond issuances in 1998 and 2000, respectively, to shore up financing after US sanctions imposed after India’s nuclear tests.

But any deposit plan or bond issuance will come at a steep cost as interest rates have risen sharply globally. Banks offered deposit rates of 3.5% to 5% in 2013, but would now likely need to pay at least 8% to 9% to attract the funds, said Madhavi Arora, economist at Emkay Global Financial Services Ltd.

Bankers in recent meetings with the RBI have sought subsidized swap rates to make such deposits viable, according to people familiar with the discussions. An email sent to the RBI was not immediately answered.

“A combination of measures, such as limiting import demand and incentivising dollar raising via tools including rate hikes, can help break the negative feedback loop between currency market expectations and the pace of rupee depreciation,” said Anubhuti Sahay, economist at Standard Chartered Plc.

Still, the risk is that using higher interest rates to defend the rupee could inflict broader economic damage while offering only limited support to the currency. “It did not work in 2013; it will not work now,” said Arora.

Ultimately, the bigger challenge is attracting and retaining durable capital inflows. Investors have sold Indian stocks this year with foreign portfolio outflows so far in 2026 already surpassing last year’s record $19 billion.

Trying to prevent this thinning of capital flows will require “structural reforms, which remains the critical test,” said Sahay of Standard Chartered.