To curb the rupee's depreciation, the Reserve Bank of India (RBI) has shifted to a "second line of defense" after depleting its foreign exchange reserves: a combination of macroprudential tools, including restrictions on derivatives trading, increases in foreign exchange risk reserves, and opening a dollar window for oil companies. Nomura points out that if the global environment does not improve, further measures such as exchange rate flexibility and coordinated fiscal and monetary policies may be implemented. The direct effects of macroprudential tools are usually limited, and the market typically digests them within weeks; the real risk lies in the moment "exchange rate flexibility" is activated—the point at which depreciation expectations shift from implicit to explicit, simultaneously impacting carry trades and the pricing of volatility in Asian currencies. Another implication is the divergence in policy paths: expectations of a Federal Reserve pause in October are strengthening, while central banks in many Asian countries (India, Singapore, etc.) are moving towards tightening. This inverse movement of the US-Asia interest rate differential represents a variable that has not yet been fully reflected in emerging market asset pricing over the next one to two quarters.
