India's central bank has implemented new restrictions on banks shorting the rupee as it struggles to stabilize one of Asia's worst-performing currencies amid regional conflict. The Reserve Bank of India has lost $40 billion in foreign-exchange reserves in just one month as the US-Israel war on Iran drives up import costs and triggers capital outflows.

The RBI's regulatory actions, including limits on open positions and derivatives trading, reveal its reluctance to allow the rupee to float freely despite IMF recommendations. India's chief economic adviser from 2014-2018, Arvind Subramanian, notes that while the country officially follows an inflation targeting framework, the RBI has historically intervened to prevent both appreciation and depreciation. The central bank's net short position via forwards has grown from $67 billion in January to potentially $100 billion today.

With foreign investors pulling out nearly $12 billion in March alone and remittances from Gulf workers drying up, the RBI faces mounting pressure. Foreign currency assets have fallen to $551 billion, covering roughly seven months of imports, while total reserves stand at $688 billion. Governor Sanjay Malhotra insists reserves remain sufficient and expects them to increase with new trade deals, but analysts warn the central bank's toolbox has limits as India's import bill continues to climb.