<h2><strong>Executive Summary</strong> </h2><ul><li><p>The rupee’s <strong>recent weakness</strong> appears to reflect a combination of <strong>structural and cyclical factors</strong>.</p></li><li><p><strong>US interest rates</strong> have moved materially above the near-zero levels seen during earlier periods, narrowing the <strong>relative rate advantage of rupee assets</strong>.</p></li><li><p>Recent RBI measures (FCNR, ECB, and OFCB) have attracted <strong>sizeable foreign-currency inflows</strong>, though most of it is borrowed and needs to be repaid.</p></li><li><p><strong>IT services</strong> exports, which for years offset India's trade deficit, are coming under pressure as business models gets reshaped by AI.</p></li><li><p>Increased hedging activity by <strong>equity FPIs</strong> and, to some extent, FDIs may indicate <strong>greater sensitivity to currency risk</strong>.</p></li></ul>.<p>The rupee had its roughest stretch in over a decade, sliding from around 84-85/$ last year to 96-97/$ currently, one of Asia's worst-performing currencies. A widening current account deficit, FII outflows, high crude prices and narrowing rate differentials all pushed in the same direction, with the RBI drawing down reserves to slow the fall.</p><p>In this session, Manoj Goel, Managing Director & Head, Corporate FX Sales — India and the Indian Subcontinent, Citi, separated the fundamentals of this year's slide from the noise. He examined how hedge ratios and tenor should shift with ₹92–97 per US dollar as the new working range, and what CFOs ought to be doing to stress-test their balance sheets for a rupee that stays weak for longer.</p>.<h2><strong>The Rupee </strong>Weakness </h2><ul><li><p>The rupee has depreciated, but the US Dollar Index has hovered around 99–100 for a while and hasn't strengthened much against other currencies. This suggests that, in addition to global factors, domestic and India-specific dynamics have been influencing the rupee's performance.</p></li><li><p>Multiple shocks have hit in quick succession with no time to recover between them. Normally, the RBI gets a window to stabilise circumstances between shocks, but this has not been the case this time.</p></li><li><p>Post-COVID-19, India was the shining star story. However, with AI reshaping the narrative, global clients are focusing on <strong>maintenance instead of expansion</strong>, threatening IT services exports that traditionally helped offset the large trade deficit.</p></li><li><p>Historically, FPI flows were a key driver of India's BoP. More recently, an increasing share of FDI appears to be hedged, creating a potential drag on BoP flows and signaling a more cautious outlook on the rupee among global investors and corporates. Recent changes to withholding tax and long-term capital gains rules have helped improve sentiment, particularly towards debt investments, but the shift in investor behaviour remains noteworthy.</p></li><li><p>Even people who still believe in the India growth story want to see dollar returns, not just rupee returns.</p></li><li><p>India’s cumulative net BOP position over FY2024-25 and FY2025-26 reflects a reserve depletion of approximately $29 billion, averaging around $14 billion annually. This remains modest relative to the RBI’s reported foreign-exchange reserves of $740.8 billion as of August 28, 2026. Immediately before the FCNR(B) scheme commenced on June 8, 2026, reserves stood at approximately $682 billion, while the RBI’s net short forward position was around $107 billion at end-May 2026. Adjusting for these commitments, the indicative reserve position was approximately $575 billion. For comparison, reserves stood at around $652 billion at end-June 2024. The difference indicates that reserve movements may reflect a combination of trade flows, capital flows and other foreign-exchange market factors.</p></li></ul>.<h2><strong>The Real Driver: Dollar Interest Rates</strong></h2><ul><li><p>The main difference between today and 2013, when the 'Taper Tantrum' hit, is <strong>dollar interest rates</strong>. Back then, the rupee carried a 7% rate advantage over a zero dollar rate. Now, the long-term dollar rate view is closer to <strong>3%</strong> and the dollar-rupee rate gap has compressed sharply, with money flowing back to the US for both debt and equity reasons.</p></li><li><p>This shows up in actual capital flows. For instance, companies that used to leave dividend money sitting in India because it earned more here are now <strong>repatriating capital very regularly</strong>.</p></li><li><p>As long as dollar rates stay elevated, the rupee will remain under pressure. The one (highly unlikely) factor that could reverse this would be for dollar rates to head back towards zero, or for the world to begin focusing on the quantum of US debt and the twin deficit.</p></li><li><p>In terms of inflation, India’s current core CPI of approximately 3% may differ from cost trends across certain private and urban expenditure categories, including healthcare, education, and housing. This may also result in differences between benchmark CPI-linked pricing arrangements and the wage-cost trends experienced by some companies.</p></li></ul>.<h2><strong>What RBI and Government have done so far</strong></h2><ul><li><p>The government attracted a significant amount, approximately $127 billion, through FCNR alone. More importantly the exemption on WHT and Long term capital gain for FPI debt segment represents a significant signal of intent.</p></li><li><p>Most of the FCNR funds have a 3–5-year maturity, giving India more time to address the underlying issues. This provides additional time for underlying external-sector adjustments to take place.</p></li><li><p>The RBI’s headline reserve figure of $741 billion as of August 28, 2026 reflects a strong position; however, outstanding forward-book commitments should also be considered when evaluating the net external reserve position.</p></li><li><p>Large FCNR inflows have also created a situation in which the RBI needs to manage currency conditions and domestic liquidity simultaneously.</p></li></ul>.<h2><strong>Hedging Strategy Takeaways</strong></h2><ul><li><p>Finance leaders should move away from the assumption that the rupee will depreciate steadily by only 3–4% per annum. 100 is just a number and history shows that many countries across the globe have seen sustained large currency movements.</p></li><li><p><strong>Plain vanilla forwards</strong> lock companies into a fixed rate for 100% of their exposure regardless of how the currency subsequently moves. If the rupee moves in a company's favour after hedging, it remains stuck at the locked rate, highlighting the need for alternative hedging mechanisms, particularly option structures that allow participation in outsized moves.</p></li><li><p>Companies should watch out for <strong>contracts with inflation-linked repricing clauses</strong>. Many only hold up to 5–6% currency movement before renegotiation kicks in. Tail risks beyond that will need separate coverage.</p></li><li><p>Back-testing is highly sensitive to the starting point chosen. A key input is <strong>board risk appetite</strong>, and how much currency movement the underlying business can absorb.</p></li><li><p>Option volatility and, consequently, option premiums are relatively low for the INR, as corporates generally refrain from structure which involves buying optionality. Hence, buying options is a relatively cheaper way to buy tail risk protection.</p></li><li><p>Invoicing in INR is preferable where feasible, as it eliminates currency risk. However, the choice of invoicing currency should also consider the trading partner’s preferences and broader commercial requirements.</p></li></ul>
<h2><strong>Executive Summary</strong> </h2><ul><li><p>The rupee’s <strong>recent weakness</strong> appears to reflect a combination of <strong>structural and cyclical factors</strong>.</p></li><li><p><strong>US interest rates</strong> have moved materially above the near-zero levels seen during earlier periods, narrowing the <strong>relative rate advantage of rupee assets</strong>.</p></li><li><p>Recent RBI measures (FCNR, ECB, and OFCB) have attracted <strong>sizeable foreign-currency inflows</strong>, though most of it is borrowed and needs to be repaid.</p></li><li><p><strong>IT services</strong> exports, which for years offset India's trade deficit, are coming under pressure as business models gets reshaped by AI.</p></li><li><p>Increased hedging activity by <strong>equity FPIs</strong> and, to some extent, FDIs may indicate <strong>greater sensitivity to currency risk</strong>.</p></li></ul>.<p>The rupee had its roughest stretch in over a decade, sliding from around 84-85/$ last year to 96-97/$ currently, one of Asia's worst-performing currencies. A widening current account deficit, FII outflows, high crude prices and narrowing rate differentials all pushed in the same direction, with the RBI drawing down reserves to slow the fall.</p><p>In this session, Manoj Goel, Managing Director & Head, Corporate FX Sales — India and the Indian Subcontinent, Citi, separated the fundamentals of this year's slide from the noise. He examined how hedge ratios and tenor should shift with ₹92–97 per US dollar as the new working range, and what CFOs ought to be doing to stress-test their balance sheets for a rupee that stays weak for longer.</p>.<h2><strong>The Rupee </strong>Weakness </h2><ul><li><p>The rupee has depreciated, but the US Dollar Index has hovered around 99–100 for a while and hasn't strengthened much against other currencies. This suggests that, in addition to global factors, domestic and India-specific dynamics have been influencing the rupee's performance.</p></li><li><p>Multiple shocks have hit in quick succession with no time to recover between them. Normally, the RBI gets a window to stabilise circumstances between shocks, but this has not been the case this time.</p></li><li><p>Post-COVID-19, India was the shining star story. However, with AI reshaping the narrative, global clients are focusing on <strong>maintenance instead of expansion</strong>, threatening IT services exports that traditionally helped offset the large trade deficit.</p></li><li><p>Historically, FPI flows were a key driver of India's BoP. More recently, an increasing share of FDI appears to be hedged, creating a potential drag on BoP flows and signaling a more cautious outlook on the rupee among global investors and corporates. Recent changes to withholding tax and long-term capital gains rules have helped improve sentiment, particularly towards debt investments, but the shift in investor behaviour remains noteworthy.</p></li><li><p>Even people who still believe in the India growth story want to see dollar returns, not just rupee returns.</p></li><li><p>India’s cumulative net BOP position over FY2024-25 and FY2025-26 reflects a reserve depletion of approximately $29 billion, averaging around $14 billion annually. This remains modest relative to the RBI’s reported foreign-exchange reserves of $740.8 billion as of August 28, 2026. Immediately before the FCNR(B) scheme commenced on June 8, 2026, reserves stood at approximately $682 billion, while the RBI’s net short forward position was around $107 billion at end-May 2026. Adjusting for these commitments, the indicative reserve position was approximately $575 billion. For comparison, reserves stood at around $652 billion at end-June 2024. The difference indicates that reserve movements may reflect a combination of trade flows, capital flows and other foreign-exchange market factors.</p></li></ul>.<h2><strong>The Real Driver: Dollar Interest Rates</strong></h2><ul><li><p>The main difference between today and 2013, when the 'Taper Tantrum' hit, is <strong>dollar interest rates</strong>. Back then, the rupee carried a 7% rate advantage over a zero dollar rate. Now, the long-term dollar rate view is closer to <strong>3%</strong> and the dollar-rupee rate gap has compressed sharply, with money flowing back to the US for both debt and equity reasons.</p></li><li><p>This shows up in actual capital flows. For instance, companies that used to leave dividend money sitting in India because it earned more here are now <strong>repatriating capital very regularly</strong>.</p></li><li><p>As long as dollar rates stay elevated, the rupee will remain under pressure. The one (highly unlikely) factor that could reverse this would be for dollar rates to head back towards zero, or for the world to begin focusing on the quantum of US debt and the twin deficit.</p></li><li><p>In terms of inflation, India’s current core CPI of approximately 3% may differ from cost trends across certain private and urban expenditure categories, including healthcare, education, and housing. This may also result in differences between benchmark CPI-linked pricing arrangements and the wage-cost trends experienced by some companies.</p></li></ul>.<h2><strong>What RBI and Government have done so far</strong></h2><ul><li><p>The government attracted a significant amount, approximately $127 billion, through FCNR alone. More importantly the exemption on WHT and Long term capital gain for FPI debt segment represents a significant signal of intent.</p></li><li><p>Most of the FCNR funds have a 3–5-year maturity, giving India more time to address the underlying issues. This provides additional time for underlying external-sector adjustments to take place.</p></li><li><p>The RBI’s headline reserve figure of $741 billion as of August 28, 2026 reflects a strong position; however, outstanding forward-book commitments should also be considered when evaluating the net external reserve position.</p></li><li><p>Large FCNR inflows have also created a situation in which the RBI needs to manage currency conditions and domestic liquidity simultaneously.</p></li></ul>.<h2><strong>Hedging Strategy Takeaways</strong></h2><ul><li><p>Finance leaders should move away from the assumption that the rupee will depreciate steadily by only 3–4% per annum. 100 is just a number and history shows that many countries across the globe have seen sustained large currency movements.</p></li><li><p><strong>Plain vanilla forwards</strong> lock companies into a fixed rate for 100% of their exposure regardless of how the currency subsequently moves. If the rupee moves in a company's favour after hedging, it remains stuck at the locked rate, highlighting the need for alternative hedging mechanisms, particularly option structures that allow participation in outsized moves.</p></li><li><p>Companies should watch out for <strong>contracts with inflation-linked repricing clauses</strong>. Many only hold up to 5–6% currency movement before renegotiation kicks in. Tail risks beyond that will need separate coverage.</p></li><li><p>Back-testing is highly sensitive to the starting point chosen. A key input is <strong>board risk appetite</strong>, and how much currency movement the underlying business can absorb.</p></li><li><p>Option volatility and, consequently, option premiums are relatively low for the INR, as corporates generally refrain from structure which involves buying optionality. Hence, buying options is a relatively cheaper way to buy tail risk protection.</p></li><li><p>Invoicing in INR is preferable where feasible, as it eliminates currency risk. However, the choice of invoicing currency should also consider the trading partner’s preferences and broader commercial requirements.</p></li></ul>
