Indian Rupee Rebounds as Central Bank Steps In—What Traders Need to Know

The Reserve Bank of India (RBI) made a decisive move on Wednesday, actively participating in currency markets to bolster the Indian Rupee (INR) against the US Dollar (USD). The intervention proved effective, as the USD/INR exchange rate retreated sharply by over 1% from its recent peak of 91.56, settling near the 90.00 level. State-run banks, believed to be acting under RBI directives, were observed selling US dollars in substantial quantities across both spot markets and Non-deliverable Forward (NDF) channels, according to multiple market participants.

This central bank action was hardly surprising given the Rupee’s struggles this year. The currency has depreciated approximately 6.45% year-to-date, making it the worst performer among Asian currencies against the Dollar. The weakness stems from multiple headwinds: persistent capital outflows from India’s equity markets, an unresolved trade dispute between the United States and India, and increased demand for US Dollars from Indian importers navigating the trade uncertainty.

Why Foreign Money Is Fleeing India’s Equity Markets

The outflow of foreign capital has been particularly severe. Foreign Institutional Investors (FIIs) turned net sellers in seven of the first eleven months of the year. December’s losses were particularly steep, with FIIs offloading stakes valued at approximately Rs. 23,455.75 crore from Indian equities. This sustained withdrawal of foreign investment has created consistent downward pressure on the Rupee, as investors converted Rupees to Dollars for repatriation.

The US-India trade stalemate has compounded this problem. Without a clear agreement, Indian importers remain uncertain about future tariffs and pricing, pushing them to hedge by purchasing dollars. This structural demand for foreign currency has been a significant headwind for the domestic currency throughout the period.

RBI’s Confidence Despite Economic Headwinds

Despite the currency pressure, RBI Governor Sanjay Malhotra recently shared an optimistic outlook in discussions with the Financial Times. He emphasized that the central bank would maintain accommodative monetary conditions, with interest rates expected to “remain low for a longer period.” However, Malhotra also acknowledged that recent GDP figures came in surprisingly weak, prompting the RBI to refine its economic forecasting models.

Looking ahead, the Governor suggested that a potential trade resolution between the US and India could provide a significant boost to growth, with the impact potentially reaching as much as 0.5% of GDP. This represents a meaningful uplift to India’s economic trajectory and underscores why resolving the trade dispute has become a policy priority.

US Dollar Steadies Despite Weak Economic Data

While the RBI was supporting the Rupee, the US Dollar was posting its own recovery across Asian trading hours on Wednesday. The US Dollar Index (DXY), which measures the Greenback’s strength against six major currencies, gained 0.17% to approach 98.40. This rebound followed a volatile Tuesday session where the index had touched an eight-week low near 98.00.

The driver of Dollar strength was somewhat paradoxical: despite continuing signs of US economic softness, the currency found support as traders assessed what these weakness signals mean for policy. Labour market data painted a mixed picture. The combined Nonfarm Payrolls report for October and November showed rising unemployment at 4.6%—the highest level since September 2021—while job creation figures were uninspiring: a loss of 105,000 positions in October followed by gains of just 64,000 in November.

Beyond labour metrics, other economic indicators disappointed. October’s Retail Sales came in flat month-on-month, missing expectations for 0.1% growth. Meanwhile, December’s flash Composite PMI reading for private sector activity declined to 53.0, a notable drop from November’s 53.4 level, suggesting moderating business momentum.

Market Interpretation: Data Distortions Cloud the Picture

Despite the weak data, market participants largely dismissed the figures as unreliable due to recent US government operations disruptions that temporarily distorted standard reporting patterns. Most analysts believe the Federal Reserve will maintain its current policy stance, unswayed by these potentially distorted economic signals. The CME FedWatch tool continues to show near-zero probability of Fed rate cuts at the January 2026 policy meeting, suggesting the market expects steady rates in the near term.

The real test for Dollar direction will come with Thursday’s release of November’s Consumer Price Index (CPI) data. This inflation metric remains the critical focal point for Fed guidance and market positioning in the weeks ahead.

Technical Picture: USD/INR Steadies Above Key Support

From a technical perspective, USD/INR was trading near 90.5370 as the session progressed, maintaining its position above a critical 20-day Exponential Moving Average (EMA) support level at 90.1278. The 20-EMA continues to slope upward, preserving the pair’s intermediate-term bullish character.

The Relative Strength Index (RSI) stands at 59.23, modestly above the neutral 50 midline, confirming that positive momentum persists despite recent pullbacks from overbought extremes in the 70s. This configuration—price above rising moving averages with moderate positive momentum—suggests buyers retain the upper hand in the near term.

The key technical zone to monitor sits between 89.9556 and 89.8364, where the 20-EMA cluster and additional support confluence points have formed. A sustained break below this area would signal a potential shift toward consolidation, whereas maintaining support would leave room for further appreciation.

Pullbacks toward the moving average have been routine within this uptrend, and such corrections have historically found bids from intermediate-term buyers. The structure remains tilted favorably for higher prices while price defends the moving average base.

Understanding the Rupee: Key Drivers and Market Mechanics

The Indian Rupee sits at a crossroads of multiple powerful forces. As a developing market currency, it remains highly sensitive to global economic shifts and external demand factors. Crude oil prices significantly impact the Rupee given India’s dependence on imported petroleum. Currency strength of the US Dollar—the global medium for most international trade—remains central to Rupee valuation. Foreign investment flows represent another critical variable, with surges in international capital inflowing strengthening the currency and outflows producing weakness.

The RBI’s direct intervention in currency markets serves as a stabilization mechanism, designed to prevent excessive volatility that could disrupt trade flows and foreign commerce. By managing the exchange rate within reasonable bands, the central bank supports business planning and economic stability. The RBI also targets a 4% inflation rate through interest rate adjustments, with higher rates generally supporting the currency through multiple transmission channels.

Interest rate levels exert outsized influence on the Rupee through the carry trade mechanism. When India offers higher yields than foreign markets, international investors are incentivized to borrow in lower-yielding jurisdictions and deploy capital in India for yield differentials. This demand for Rupees supports the currency. Conversely, when India’s rates decline relative to global benchmarks, this carry trade appeal diminishes.

Macroeconomic fundamentals shape the currency over longer horizons. Stronger GDP growth attracts foreign investment and supports the currency. Lower inflation—particularly when India’s inflation runs below regional peer levels—reflects currency stability and competitiveness. A trade balance that is less negative indicates strong export demand and Rupee-supporting cash flows. Higher real interest rates (nominal rates minus inflation) attract international savers and investors seeking yield.

During risk-on environments, both Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) flows strengthen, with capital seeking exposure to high-growth emerging markets like India. This foreign investment demand directly supports the Rupee. Conversely, risk-off periods see capital flight toward safe havens, putting immediate pressure on the currency.

Inflation dynamics present a double-edged sword for the Rupee. Higher inflation relative to trading partners weakens competitiveness and encourages imports, creating selling pressure on the currency. However, inflation-driven central bank rate hikes can support the Rupee by improving real returns for international investors, potentially offsetting the initial weakness.

The interplay of these factors creates continuous shifts in the Rupee’s trajectory. Wednesday’s RBI intervention exemplifies how policy coordination can temporarily override market direction, though longer-term currency trends ultimately reflect deeper economic fundamentals and capital flow patterns.