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The Indian rupee has recovered after measures by the Reserve Bank of India (RBI) eased dollar demand in the spot market. However, forward premiums and options market signals suggest investors remain cautious about the currency’s outlook, with hedging costs pointing to concerns over further depreciation.
The Indian rupee’s recent recovery and relative stability are masking persistent anxiety in currency markets, with forward and options data indicating that investors remain wary of further weakness.
The rupee has declined around 5.5 per cent so far in 2026, weighed down by elevated crude oil prices and foreign portfolio outflows. While intervention by the Reserve Bank of India (RBI) has helped stabilise the spot market, pricing in other segments of the currency market suggests that confidence in the recovery remains fragile.
The divergence is particularly visible in the forward market, where premiums have climbed well above levels implied by the interest rate differential between India and the United States.
Forward premiums generally reflect interest rate differences between two currencies, along with dollar demand and supply. Bankers said the unusually wide gap suggests investors remain unconvinced by the rupee’s central bank-led recovery.
The RBI has introduced measures to ease pressure on the spot currency market and reduce demand for dollars.
It has allowed state-run oil companies to purchase dollars directly from the central bank, removing an estimated $10 billion to $12 billion in monthly dollar demand from the open market.
More from BusinessThe central bank has also imposed reserve requirements on large hedging transactions, increasing the cost of such positions and curbing market activity.
These measures initially helped the rupee climb to a roughly six-week high in the spot market. However, they also triggered unusual volatility in the forward market.
“When spot demand is squeezed, forwards reflexively take the strain,” said Madhavi Arora, chief economist at Emkay Global Financial Services, adding that forward premiums are “severely dislocated”.
Trading volumes in India’s onshore forward market have thinned since the RBI introduced its measures. Lower liquidity has amplified price swings and made currency pricing less predictable.
Volatility has also spilled over into the offshore non-deliverable forward (NDF) market, where forward points have swung sharply between premiums and discounts compared with onshore levels.
Forward points represent the cost of hedging future currency exposure and are influenced primarily by interest rate differentials and dollar demand and supply.
The sharp movements across onshore and offshore markets underline uncertainty about the rupee’s direction, according to bankers and analysts.
What are options markets signalling about the rupee?
The options market is also pointing towards growing caution among investors.
Data shows that risk reversals across maturities ranging from one month to one year have increased over the past three weeks. This indicates that investors are willing to pay more for protection against further rupee depreciation than for protection against a recovery.
Risk reversals measure the relative cost of options used to hedge against currency movements in either direction. A rise in the measure suggests that protection against rupee weakness is becoming more expensive.
However, implied volatility across one-month to one-year maturities remains relatively subdued. It is hovering around its year-to-date average and below the peaks recorded earlier this year.
This suggests that investors are more concerned about the direction of the rupee than an imminent spike in currency market volatility.
In other words, the rupee’s relative calm in the spot market does not necessarily signal a broader improvement in investor confidence. Forward and options pricing indicate that market participants continue to hedge against the possibility of further weakness.
