Will RBI's Exchange Rate Policy Stabilize USD/INR, Or Is More Volatility Ahead?

The Indian Rupee found itself in precarious territory on Thursday as the USD/INR pair hovered near the 90.80 mark, caught between aggressive central bank intervention and lingering currency headwinds. Market participants braced for potential action from the Reserve Bank of India, anticipating fresh efforts to contain the rupee’s downward spiral through direct forex operations in both spot and forward markets.

Central Bank Firefighting: RBI Steps Up Currency Defense

The reserve bank demonstrated its resolve on Wednesday by executing substantial dollar sales across multiple trading venues, halting the pair’s ascent at a concerning 91.55 level—territory previously uncharted. These tactical interventions underscored the RBI’s commitment to maintaining orderly exchange rate movement through its note exchange policy framework.

Traders assessed the likelihood of additional intervention as “high probability,” signaling that the central bank would likely persist with defensive operations. This aggressive posture reflects growing concern about rupee depreciation driven by persistent capital outflows and deteriorating trade dynamics between India and the United States.

The Foreign Investment Riddle: A Potential Turning Point?

The narrative took an intriguing twist when Foreign Institutional Investors (FIIs) shifted their stance after weeks of relentless selling. Wednesday witnessed net purchases of approximately Rs. 1,171.71 crore—a notable reversal that could signal shifting sentiment. Throughout most of the month, these major foreign players had systematically reduced exposure to Indian equities, attributed largely to the ongoing US-India trade stalemate.

This pivot, while encouraging, may prove ephemeral without concrete progress on trade negotiations. The underlying structural challenge remains unresolved: foreign capital flows remain vulnerable to policy developments that could reignite outflow pressures.

Technical Picture: Bullish Momentum, But Fragile Support Levels

On the daily timeframe, USD/INR trades at 90.7840 with price action anchored above the 20-day exponential moving average at 90.2106. The technical setup reveals:

• Momentum indicators: The Relative Strength Index (RSI) sits at 63.40, maintaining bullish positioning after retreating from overbought extremes
• Trend structure: Continued higher slopes in the moving average suggest upside bias persists as long as daily closes remain supported above the 20-day EMA
• Risk levels: A decisive breakdown beneath the moving average would neutralize the uptrend and potentially trigger a deeper pullback

The RSI in the mid-60s range favors trend extension, though a reversal toward 50 would indicate weakening impulse.

Dollar Index Dynamics: Fed Policy Uncertainty Weighs

The broader currency complex moved sideways as the US Dollar Index (DXY) edged marginally higher near 98.45. However, underlying Fed policy expectations created conflicting signals for the greenback:

Interest Rate Expectations: According to CME FedWatch data, markets price just 24.4% probability of a 25 basis point rate cut by the Federal Reserve in January 2026—a notable decline from earlier dovish positioning. Chairman Jerome Powell’s recent emphasis on “a very high bar” for further easing has dampened rate-cut enthusiasm.

Leadership Transition Headwinds: The anticipated appointment of a new Federal Reserve chair supportive of lower rates—potentially aligned with Trump administration preferences—paradoxically threatens dollar strength. President Trump signaled that the incoming chair would favor rate reductions, suggesting policy direction that could compromise Fed independence and weigh on the currency.

Market Focus: CPI Data as a Key Crossroads

Thursday’s session would pivot on the release of US Consumer Price Index (CPI) data for November at 13:30 GMT. Both headline and core inflation readings were expected to maintain a 3% annualized pace. This report will significantly influence forward guidance on US monetary policy and, by extension, capital allocation decisions affecting emerging market currencies like the Indian rupee.

Understanding INR Dynamics: What Moves the Indian Currency?

The Indian Rupee operates within a complex web of external influences that extend well beyond typical exchange rate mechanics. As the RBI maintains its note exchange policy and manages forex market conditions, several factors shape rupee direction:

Import Dependency and Energy Costs: India’s heavy reliance on crude oil imports means that global energy price movements directly transmit through the currency. Rising oil prices typically pressure the rupee as importers require more domestic currency to settle international transactions.

Trade Flow Mechanics: Because international commerce predominantly occurs in US dollars, the relative balance of India’s imports and exports directly impacts rupee demand and supply. A deteriorating trade balance necessitates greater rupee sales to purchase foreign exchange, creating depreciation pressure.

Capital Flow Architecture: Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) flows represent major determinants of rupee strength. Risk-on environments attract overseas capital, supporting the currency, while geopolitical tensions or policy uncertainty can reverse these flows with dramatic speed.

RBI’s Active Management: Beyond exchange rate stability objectives, the Reserve Bank employs interest rate adjustments to manage inflation around its 4% target. The carry trade mechanism ensures that higher domestic rates attract international investors seeking yield advantages, thereby strengthening the rupee through increased demand for rupee-denominated assets.

Macroeconomic Foundations: GDP growth trajectories, relative inflation differentials versus trading partners, and real interest rates (nominal rates minus inflation) all influence the rupee’s fundamental valuation. Stronger economic growth typically attracts foreign investment and buttresses currency strength, while inflation above peer economies signals devaluation pressures through currency oversupply dynamics.

The interplay of these factors means the Indian Rupee remains perpetually sensitive to both internal policy decisions and external global developments—a characteristic that demands constant vigilance from both RBI policymakers and market participants.