Rupee Rebounds as RBI Defends Against Dollar Strength; USD/INR Falls Below 91

The Indian Rupee demonstrated resilience on Wednesday as aggressive central bank intervention supported the domestic currency against sustained US Dollar pressure. The USD/INR exchange rate retreated sharply, declining more than 1% to hover near the 90.00 level, retreating significantly from its previous peak of 91.56. This pullback reflects coordinated action by India’s Reserve Bank, with state-run banking channels actively supplying dollars into the market to stabilize the currency.

The Indian Rupee has struggled throughout 2024, ranking as the weakest performer among major Asian currencies with a year-to-date depreciation approaching 6.45%. Foreign institutional capital flight remains a primary headwind, with FIIs maintaining net seller positions in seven of the first eleven months. December data underscored the magnitude of outflows, as overseas investors reduced Indian equity holdings by Rs. 23,455.75 crore during the month alone.

Market Mechanics Driving Currency Weakness

The absence of a bilateral trade resolution between Washington and New Delhi has intensified currency pressures. Trade uncertainty has prompted Indian importers to raise demand for US Dollars to hedge future payment obligations, adding to depreciation momentum. Simultaneously, foreign capital reductions reflect growing caution toward Indian assets amid global monetary tightening concerns.

On the policy front, RBI Governor Sanjay Malhotra signaled in recent comments that rate adjustments will remain accommodative over an extended horizon. He noted that recent GDP surprises required the central bank to refine its economic forecasting models. Notably, Malhotra estimated that a potential US-India trade agreement could deliver as much as 0.5% stimulus to overall economic growth, suggesting the central bank views trade normalization as a meaningful upside catalyst.

US Dollar Steadies Despite Mixed Economic Signals

The Greenback staged a modest recovery during Asian hours on Wednesday, with the Dollar Index (DXY) advancing 0.17% to near 98.40 levels. This rebound followed Tuesday’s bounce from eight-week lows near 98.00, as fresh US labor data offered some support despite underlying weakness.

October-November employment figures presented a mixed picture. Job creation moderated to 64,000 in November following a 105,000 decline in October, while the unemployment rate ticked upward to 4.6%—the highest reading since September 2021. Simultaneously, October retail spending came in flat contrary to expectations for 0.1% monthly growth. The flash Composite PMI for December’s private sector activity registered 53.0, representing a meaningful deceleration from November’s 54.2 reading.

Analysts caution that recent data distortions stemming from government shutdown effects may limit immediate policy implications. Current CME FedWatch probabilities suggest minimal likelihood of Fed rate cuts materializing at the January 2026 meeting. Investors will now train focus on Thursday’s release of November Consumer Price Index data, which could provide clearer signals on inflation trajectory.

Technical Picture: Moving Average Support Holds Firm

From a technical standpoint, USD/INR presently trades around 90.5370 on daily timeframes, maintaining positioning above the ascending 20-day Exponential Moving Average (EMA) positioned at 90.1278. This moving average configuration preserves an underlying bullish lean despite recent pullback in momentum indicators.

The Relative Strength Index (RSI) stands at 59.23, positioned above the neutral 50 threshold and confirming positive directional bias following its retreat from overbought extremes. The uptrend remains structurally intact with the 20-EMA serving as dynamic support.

Should USD/INR sustain levels above the moving average cluster spanning 89.9556–89.8364, further upside extension remains probable. Conversely, a daily close below this support zone would suggest a transition toward range consolidation rather than continued directional conviction. Near-term dips toward the 20-EMA would likely find buying interest while the technical structure remains constructive.

Understanding Rupee Dynamics

The Indian Rupee’s sensitivity to external variables distinguishes it within regional currency markets. Oil import dependency creates direct exposure to crude price fluctuations, while trade invoicing predominantly in US Dollars ties the Rupee closely to Dollar dynamics. Foreign investment flows serve as an additional critical variable influencing medium-term directionality.

Central bank forex operations represent a primary stabilization tool. The RBI actively manages exchange rates to support trade facilitation while maintaining an inflation target centered at 4%. Interest rate adjustments complement these interventions, with higher rates typically attracting capital inflows that strengthen the currency through the carry trade mechanism—wherein investors fund positions in lower-yielding jurisdictions and deploy capital toward higher-yielding markets.

Macroeconomic fundamentals shaping the Rupee include growth momentum, inflation dynamics, interest rate differentials, trade balances, and FDI/FII flows. Accelerating GDP growth typically attracts overseas investment, creating buying pressure on the currency. A narrowing trade deficit supports longer-term appreciation, while real interest rates—adjusted for inflation—provide meaningful encouragement for foreign capital deployment. Risk-on sentiment environments amplify these inflows.

Conversely, elevated inflation—particularly if exceeding regional peer inflation rates—poses headwinds through devaluation pressures and import competitiveness erosion. Higher inflation typically compels RBI rate hikes, which can offset currency weakness through yield attractions despite underlying price-level deterioration.