The Reserve Bank of India (RBI) is selling US dollars in the foreign exchange market to support the rupee, continuing a sustained defence of a currency that has traded near record lows against the dollar for much of 2026. Three traders told Reuters the central bank was selling USD/INR, with the immediate catalyst cited as a rise in oil prices.

The rupee weakened sharply this year, sliding from around 90 per dollar in January toward a record intraday low near 97 in May, before recovering somewhat as the central bank stepped up near-daily dollar sales. That intervention helped the currency rally approximately 1% last week alone. The scale of the slide—roughly 7% in the first five months of the year—stands out for a currency that the RBI has traditionally managed to keep among the least volatile in Asia.

The rupee's weakness stems from several reinforcing pressures. Steep US tariffs on Indian exports, reported at levels up to around 50% on categories including textiles, gems and jewellery, and machinery, have hit export competitiveness and reduced dollar inflows from trade. The tariff pressure comes at a time when India has been positioning itself as an alternative manufacturing destination within global supply chains, meaning sustained trade barriers could complicate that narrative. Concurrently, foreign portfolio investors have pulled significant sums from Indian equities and bonds throughout the year, increasing dollar demand each time positions are unwound and funds are repatriated.

Elevated oil prices, driven by Middle East tensions including disruption risk around the Strait of Hormuz, have compounded the pressure further. India imports roughly 70% of its crude oil and pays for it in dollars, directly worsening the import bill whenever crude prices spike. As one of the world's largest crude importers, India's current account is among the most sensitive in Asia to oil price shocks, with every $10-per-barrel rise in Brent typically adding billions to the annual import bill.

The RBI has responded with sustained intervention across both spot and offshore non-deliverable forward markets, drawing on foreign exchange reserves that stand at approximately $680 to $690 billion—among the largest in the world and providing the central bank considerable capacity to continue defending the currency. The central bank has also taken complementary steps during the year, including measures to curb speculative arbitrage and forward contract manipulation, alongside incentives for external commercial borrowing aimed at attracting more stable capital inflows.

On the monetary policy side, the RBI has kept its repo rate unchanged at 5.25% for a fourth consecutive meeting, maintaining a neutral policy stance while raising its growth forecasts for the coming fiscal years despite softer business activity. The decision to hold reflects a balancing act between supporting growth amid global headwinds and guarding against imported inflation from a weaker currency, since a declining rupee raises the rupee cost of oil and other dollar-denominated imports.

Continued RBI dollar selling signals the central bank retains a clear line in the sand around current levels and is willing to draw on its substantial reserves to defend it, which limits further near-term downside in the rupee barring a fresh shock. The intervention comes alongside a more favourable backdrop of softer oil prices and reduced market expectations for a Federal Reserve rate hike in September, both of which have eased pressure on emerging market currencies broadly as the dollar's yield advantage narrows.

That steady policy backdrop has helped shift sentiment on the rupee from fears of a slide beyond 97 per dollar toward a view that the currency may have found a firmer floor. However, the underlying structural headwinds remain far from resolved. Continued foreign institutional investor outflows and the drag from steep US tariffs on Indian exports persist as key challenges, meaning any renewed spike in crude prices or hawkish Fed repricing could quickly reverse the currency's recent stabilisation.

The rupee's trajectory also serves as a reference point for other current-account-sensitive Asian currencies facing similar oil price and capital-flow pressures, with central banks from Jakarta to Manila watching how India's reserves-backed defence holds up against the same global forces.