Indian Rupee Strengthens as Central Bank Takes Action Against Dollar Surge

The Reserve Bank of India (RBI) has made a decisive move to stabilize the domestic currency, resulting in a significant recovery for the Indian Rupee against the US Dollar this week. The USD/INR pair witnessed a sharp reversal, dropping over 1% to approach the 90.00 level, retreating from its recent peak of 91.56. According to market sources cited by Reuters, state-run financial institutions were actively supplying US Dollars to the market—widely believed to be coordinated with RBI efforts—across both conventional spot markets and the Non-deliverable Forward (NDF) segment.

Why RBI Intervention Became Necessary

The central bank’s action reflects growing concerns about the Rupee’s deteriorating performance within Asian currency markets. Year-to-date, the Indian currency has depreciated nearly 6.45%, making it the region’s weakest performer against the Greenback. Two critical factors have contributed to this downward spiral: the absence of a finalized trade agreement between New Delhi and Washington, coupled with sustained capital withdrawals from Indian equity markets.

The trade uncertainty has triggered a vicious cycle. Indian importers facing unclear tariff prospects have rushed to lock in US Dollar supplies, intensifying downward pressure on the Rupee. Meanwhile, Foreign Institutional Investors (FIIs) have turned net sellers in seven of the year’s first eleven months, offloading equities worth Rs. 23,455.75 crore during December alone. This persistent capital flight underscores international investors’ hesitancy amid bilateral trade tensions.

RBI Governor Signals Extended Accommodative Stance

In a recent Financial Times interview, Reserve Bank Governor Sanjay Malhotra outlined the central bank’s forward guidance on monetary policy. He emphasized that borrowing costs will “remain low for a longer period,” signaling the RBI’s commitment to supporting economic activity. Notably, Malhotra characterized the latest GDP data as “surprising” and acknowledged that this prompted the institution to “enhance its forecasting methodologies.”

The monetary authority also flagged the potential macroeconomic implications of US-India trade negotiations. Should the bilateral accord materialize as currently discussed, Malhotra suggested that the cumulative GDP impact could reach 0.5%—a non-trivial boost for India’s growth trajectory.

Dollar’s Temporary Recovery Amid Mixed US Economic Signals

Despite the Rupee’s rebound, the US Dollar has regained some ground following the release of domestic American economic indicators. The US Dollar Index (DXY), which gauges the currency’s strength relative to a basket of six major peers, climbed 0.17% to settle near 98.40 during Asian hours. This recovery follows Tuesday’s move off an eight-week trough near 98.00.

Recent employment data painted a complicated picture of US labor market health. Combined figures for October and November showed the Unemployment Rate climbing to 4.6%—the highest reading since September 2021. The underlying employment change was negative, with October recording a 105K job loss before November added 64K positions. Retail Sales remained tepid, posting flat month-on-month growth when analysts anticipated a 0.1% increase. Preliminary S&P Global PMI data for December revealed Composite activity at 53.0, substantially softer than November’s 54.2 reading.

Market participants note that much of this weakness likely reflects distortions from recent government shutdowns rather than underlying structural labor market deterioration. Consequently, traders do not anticipate these releases will materially alter Federal Reserve policy expectations. Current CME FedWatch monitoring suggests rate cuts remain unlikely during the January 2026 policy decision. The focus will shift to November’s Consumer Price Index report, due Thursday, which could provide clearer signals about inflation dynamics.

Technical Landscape: USD/INR Eyes Consolidation Range

From a technical standpoint, USD/INR is currently trading at 90.5370 on the daily timeframe. The pair maintains its position above the rising 20-day Exponential Moving Average (EMA), which sits at 90.1278 and continues ascending—a configuration that favors further upside exploration.

The Relative Strength Index stands at 59.23, comfortably positioned above the neutral 50 midline, confirming that positive momentum persists following a retreat from overbought extremes in the 70s. This moderate reading suggests the move retains room to extend without immediately triggering exhaustion signals.

Should USD/INR defend the 20-day EMA support level around 90.1278, conditions remain biased toward testing higher resistance. A more expansive support zone spans 89.9556–89.8364; if daily closing prices breach this band downward, the bias would shift toward range-bound consolidation. As long as the pair holds above this wider support cluster, bulls retain the technical advantage for potential extension moves higher.

Understanding the Rupee’s Sensitivity to External Dynamics

The Indian Rupee functions as one of the global foreign exchange market’s most externally-sensitive instruments. Its valuation responds to numerous cross-border variables: crude oil pricing (given India’s heavy reliance on petroleum imports), the US Dollar’s trajectory (since international trade predominantly occurs in USD), and the magnitude of incoming foreign capital flows.

Institutional policy levers also carry substantial weight. Direct Reserve Bank of India intervention in currency markets aims to prevent excessive exchange rate volatility and support bilateral trade flows. Simultaneously, the RBI calibrates short-term interest rates toward its 4% inflation target. Higher domestic rates typically support the currency through the carry trade mechanism—a strategy wherein investors borrow at cheaper foreign rates to deploy capital domestically at premium returns.

Fundamental economic variables exerting long-term influence include the inflation differential versus trading partners, real interest rate levels, GDP expansion velocity, trade balance composition, and capital inflow character. Stronger economic growth attracts overseas investment and lifts Rupee demand. Improving trade balances reduce the necessity of Rupee sales to finance imports. Real interest rate premiums (nominal rates minus inflation) appeal to international investors seeking yield. Risk-on sentiment periods witness accelerated foreign direct and portfolio investment, supporting currency appreciation. Conversely, inflation—particularly if domestically elevated relative to peer economies—erodes currency value through reduced purchasing power and raises export costs, necessitating larger Rupee volumes to finance foreign purchases.