Early Saturday, the Reserve Bank of India (RBI) announced a raft of measures to defend the rupee, which has veered precariously close to its all-time low despite an interest rate hike of 25 basis points on October 7. Only one of the steps was novel to Indian markets, having been borrowed from China.

Under the Foreign Exchange Risk Reserve (FERR), banks must now set aside 20% — the RBI can change the percentage — of forex derivative contracts over $2 million involving the rupee. This is kept in cash with the RBI and makes protection from a fall in the rupee more expensive.

Why make hedging more expensive?

This may seem counterintuitive. People at risk from exchange rate volatility, such as importers, are encouraged by authorities to protect themselves by hedging their foreign currency exposure. Importers usually pay for purchases in US dollars or the seller’s currency, and if the rupee weakens, they must pay more rupees for each dollar.

This is why India and other countries are trying to settle more trade in their own currencies — reducing the need to store foreign currencies and vulnerabilities from sharp exchange-rate movements. But while hedging is good practice, anything exerting downward pressure on the rupee is problematic right now. As one banker noted, it was local banks and traders, not foreign ones, targeted by Saturday’s measures.

The China playbook

Back in March, China cut its Foreign Exchange Risk Reserve Ratio to zero from 20%, because the yuan was continuously strengthening against the dollar. By removing the reserve ratio, China was removing the cost of betting against its own currency. India faces the opposite situation.

For countries like India that buy more from abroad than they sell, there is always pressure on the currency to weaken — more foreign currency exits India for trade than enters it. As supply of foreign currency falls due to a trade deficit, it becomes more expensive in rupees, and the rupee weakens. The rupee is down almost 7% so far in 2026 and fell to a record low of 96.96-per-dollar in May.

RBI Governor Sanjay Malhotra has argued the rupee may be undervalued by certain metrics. China, meanwhile, faces allegations that a deliberately weak renminbi drove its record $1.2 trillion trade surplus in 2025.

Emergency measures and whether they will work

For the RBI, fresh discontent was visible on October 7, when the rupee fell despite the repo rate being raised to 5.5%. Since the RBI opened the concessional swap window for Foreign Currency Non-Resident deposits in June, the banking system has been flush with money — a condition called surplus liquidity that the RBI has been trying to drain.

The measures are reminiscent of the 2013 taper tantrums, with ANZ Bank’s Dhiraj Nim saying they indicate the RBI wants to limit speculative and structural demand for dollars. Experts say the measures may only provide some breathing room, with much depending on crude oil prices and the behaviour of foreign investors.