The Reserve Bank of India has sold nearly $20 billion in the foreign exchange market over five weeks to defend the rupee, and the side effects are now showing up in borrowing costs. Here is how the chain works.

When the RBI sells dollars, it absorbs rupees from the banking system, draining liquidity. The system surplus collapsed from nearly Rs 1.95 lakh crore in late August to just Rs 7,650 crore on September 25. Scarcer liquidity pushes up money-market rates: the weighted average lending rate on fresh deposits rose to 7.05% in August.

For borrowers, that means banks face higher funding costs, which eventually feed into loan pricing — even without a policy rate hike. The RBI is choosing currency stability over easy liquidity, a trade-off it makes when rupee weakness threatens imported inflation. With a rate decision looming, markets will watch whether the central bank keeps intervening, lets the rupee adjust, or tightens further.