The rupee’s fall from ₹88.40 to ₹96.80 a dollar over roughly a year might suggest a windfall for traders positioning themselves in consonance with the trend. Yet treasury managers describe the returns of the year below those of more ordinary years, with even active offshore participants apparently failing to generate performance.

These accounts do not establish that speculation is absent. Trading returns are a poor proxy for positioning, just as currency depreciation alone does not prove a speculative attack. They do, however, warrant a closer diagnosis before restrictions on dollar demand become the principal response.

The more persuasive explanation is genuine outflows: import payments, portfolio reallocations and foreign-currency debt repayments. These flows are not necessarily insensitive to the operational policy framework, but making a hedge more expensive neither cancels an invoice nor reverses an investment decision. 

It seems inconsistent that NRIs are offered generous subsidies to bring in FCNR deposits, while importers — who are managing genuine trade flows — are burdened with steep hedging costs. To a common market observer, such asymmetry may not reflect prudence in policy design.

The pattern of first subsidising or facilitating large FX inflows/leverage, then raising the cost of hedging for those who need to buy foreign currency is also not unique. Many emerging-market central banks have done versions of this:

Offer preferential swap windows or lower costs to attract foreign-currency deposits and borrowings when reserves need rebuilding.

Later tighten derivative rules or raise hedging costs when the currency comes under pressure.

The restrictions can change the timing or location of demand without reducing the underlying obligation.

Costly Cover
The RBI’s Foreign Exchange Risk Reserve, or FERR, illustrates this targeting problem. Requiring banks to commit cash against qualifying derivatives ties up funding, whose cost may be passed to customers. Even properly documented commercial exposures can therefore become more expensive to hedge.

An importer can absorb the cost, postpone cover or remain unhedged. None necessarily reduces the dollars ultimately required. Less hedging today could leave more demand concentrated near payment dates. Measures aimed at excessive precautionary buying may consequently increase vulnerability to subsequent depreciation.

Preventing duplicate hedging is a different proposition. Restricting multiple claims against the same exposure targets a specific abuse. Imposing additional costs on genuine cover reaches considerably further.

Currency futures offer a cautionary lesson: the issue is not whether the RBI formally abolished the market, but whether the restrictions eroded its usefulness as a cheap and efficient hedging mechanism. A market needs counterparties willing to assume risk, not merely participants who can afford to hedge. Reduced participation can mean poorer liquidity and more expensive execution for smaller businesses. Lower turnover alone establishes neither reduced vulnerability nor policy success.

Policy Credibility
Forward premia also require careful interpretation. Suppressing forward dollar demand could lower market-determined premia without reducing the importer’s all-in cost once banks recover their additional funding expense. The total goods and services imports.

Lower premia could also make it less expensive for the RBI to buy dollars forward and offset some forward sales, all else equal. That would help manage official commitments, but would not establish that commercial hedgers were better served.

With imports at $459.65 billion in just five months, India is heading toward a trillion-dollar import bill in 2026–27. Should hedging costs keep corporates from covering exposures, almost half a trillion dollars of imports — assuming all above exposures exceed the $2 million qualifying threshold — could remain unhedged. That level of vulnerability is not a proposition worth bargaining for, especially in the current global dynamics.

Meanwhile, participants with lawful offshore access could shift activity abroad. Smaller businesses without comparable alternatives face a less attractive choice between expensive cover and greater currency exposure.

Policy uncertainty compounds these costs. Businesses anticipating further restrictions may advance dollar purchases, while others delay hedging because protection has become expensive. Either response can make demand less orderly.

Genuine flows can become destabilising when many users act simultaneously, so intervention is not inherently misplaced.  Since speculative behaviour among importers is largely absent, the real question is what justifies the proportionality of the measures, and what benchmarks would warrant lifting the restrictions.

Policy Credibility can give businesses a stable framework for managing the risk. The test is whether these measures improve liquidity, hedging costs and the distribution of dollar demand, not merely whether spot price or forward premia briefly improve. 

A defence that discourages prudent hedging risks leaving the economy more exposed to depreciation.  Simply put, a defence that punishes prudence risks leaving the economy more exposed than before.