RBI's Bold Move Caps USD/INR Rally as Rupee Stabilizes Against Dollar Surge

The Reserve Bank of India made a decisive intervention in Wednesday’s trading session, effectively halting the Indian Rupee’s sharp decline against the US Dollar. The USD/INR pair retreated sharply, dropping over 1% to levels near 90.00, reversing from its previous peak of 91.56. This correction marked a significant stabilization effort for a currency that has struggled considerably this year, falling nearly 6.45% year-to-date—making it the weakest performer across Asian markets. For perspective, the Indian Rupee’s valuation stands at a critical juncture when considering that 1 trillion dollars in Indian rupees would represent an enormous sum reflecting the currency’s current weakness.

RBI’s Intervention Strategy and Market Dynamics

The central bank’s action was unmistakable. Multiple state-run banking institutions actively offered US dollars in the spot market and Non-deliverable Forward (NDF) markets, signaling RBI’s determination to support domestic currency stability. This proactive stance addresses broader market concerns stemming from the prolonged US-India trade negotiations deadlock, which has intensified foreign exchange pressures.

Capital flight has exacerbated the rupee’s weakness. Foreign Institutional Investors (FIIs) maintained a net selling position in seven of the past 11 months, with December alone witnessing significant equity market offloading worth Rs. 23,455.75 crore. The absence of a concrete US-India trade resolution continues to drive demand for US dollars among Indian importers, creating sustained pressure on the rupee.

Monetary Policy Signals Supportive Stance

RBI Governor Sanjay Malhotra recently signaled a dovish monetary stance in an interview with Financial Times, indicating that interest rates will remain accommodative. He highlighted surprise in recent GDP figures, prompting the central bank to recalibrate its forecasting models. Notably, Malhotra estimated that a finalized US-India trade agreement could contribute up to 0.5% to overall GDP growth, underscoring the currency’s sensitivity to bilateral trade developments.

US Dollar Recovery Amid Mixed Economic Data

The greenback extended its Tuesday recovery throughout Asian trading hours despite concerning economic signals. The US Dollar Index (DXY), measuring the dollar against six major currencies, advanced 0.17% to near 98.40, bouncing from its eight-week low of approximately 98.00.

Wednesday’s labor market data painted a complex picture. Combined Nonfarm Payrolls (NFP) figures for October and November revealed rising unemployment at 4.6%—the highest level since September 2021. The economy shed 105K positions in October before adding 64K in November. Meanwhile, retail activity stalled with month-on-month Retail Sales flat against expectations of 0.1% growth. Flash private sector PMI readings softened considerably, with the Composite PMI declining to 53.0 from 54.2 in November.

Market participants remain cautious about attributing excessive significance to this data, as government shutdown distortions likely skewed results. Fed rate cut expectations have shifted lower, with CME FedWatch tools indicating minimal probability of reductions in January 2026. Attention will pivot toward Thursday’s November Consumer Price Index release.

Technical Positioning: Rupee Defends Critical Support Levels

On the daily timeframe, USD/INR trades at 90.5370, maintaining ground above the rising 20-day Exponential Moving Average (EMA) currently positioned at 90.1278. This technical structure preserves a constructive bias for the dollar-rupee pair. The Relative Strength Index (RSI) stands at 59.23, above the neutral 50 level, confirming positive momentum despite moderating from recent overbought extremes in the 70s.

The immediate support zone clusters around the 20-day EMA at 90.1278, with extended support between 89.9556 and 89.8364. A daily close below this broader support band would signal a shift toward consolidation and chop. Conversely, sustained holds above current moving-average support would create scope for the pair to probe higher. The trend structure remains intact, though momentum has cooled from peak readings as the RSI has normalized.

Understanding Rupee Dynamics

The Indian Rupee represents one of the most externally sensitive currencies globally. Crude oil prices, given India’s substantial import dependency, the US dollar’s strength, and foreign investment flows directly influence rupee valuations. Direct RBI intervention via forex market operations and interest rate policy decisions constitute the most immediate levers affecting the currency.

Interest rate differentials play a crucial role through the carry trade mechanism—investors borrow in low-rate jurisdictions to deploy capital in higher-yielding markets, amplifying currency demand. Macroeconomic fundamentals including inflation trajectories, real interest rates, GDP growth, the trade balance, and foreign investment inflows shape medium-term rupee direction. Accelerating growth typically attracts overseas capital, strengthening demand for rupees. A less negative trade balance and higher real interest rates support rupee appreciation. Risk-on sentiment enhances Foreign Direct and Indirect Investment flows, creating tailwinds for the currency. Conversely, elevated inflation relative to peer economies pressures the rupee through increased import costs and export competitiveness deterioration, requiring more rupee sales to finance foreign purchases.