RBI's Latest Move Steadies INR as USD/INR Retreats from 91.56 Peak

The Indian Rupee demonstrated impressive resilience during Wednesday’s Asian session, with the USD/INR pair sliding more than 1% to hover around the 90.00 level. This pullback came after the currency pair had climbed to an all-time high of 91.56, reflecting mounting pressure on India’s domestic currency throughout the year. Behind this reversal lies deliberate action by the Reserve Bank of India, which has been actively supporting the Rupee through coordinated interventions in both spot and Non-deliverable Forward markets. Market participants noted that state-run banking institutions aggressively offered US Dollar supplies, signaling RBI-directed support for the embattled currency.

Why the Indian Rupee Remains Under Stress

Despite Wednesday’s recovery, the Indian Rupee has remained Asia’s weakest performer this year, depreciating approximately 6.45% year-to-date against the US Dollar. Several structural factors explain this prolonged weakness. A key concern has been the stalled trade negotiations between the United States and India, which have created uncertainty and discouraged foreign investment inflows. The absence of a breakthrough in these discussions has amplified dollar demand from Indian importers seeking to secure forward commitments.

Foreign fund flows paint a concerning picture. Foreign Institutional Investors have turned net sellers for seven of the eleven months completed this year, reflecting reduced appetite for Indian equities. December data revealed particularly acute outflows, with FII redemptions reaching Rs. 23,455.75 crore—demonstrating the scale of capital being withdrawn from Indian markets. When measured in terms of 1 trillion dollar in Indian rupees equivalent for context, such outflows represent significant headwinds for currency stability.

RBI Governor Sanjay Malhotra recently signaled that monetary policy will remain accommodative. Speaking to the Financial Times, Malhotra emphasized that interest rates will “remain low for an extended period,” prioritizing growth support amid external challenges. He also acknowledged that recent GDP data had proved “surprising,” prompting the central bank to recalibrate its forecasting frameworks. The Governor further noted that resolution of the US-India trade dispute could contribute materially to growth, potentially adding as much as 0.5% to overall GDP expansion.

US Dollar Rebounds Despite Softer Economic Data

The USD/INR corrective move occurred amid a complex US economic backdrop. The US Dollar Index, measuring the Greenback’s strength against six major currencies, climbed 0.17% to approach 98.40 during Wednesday’s session, representing a continuation of Tuesday’s recovery from an eight-week nadir near 98.00.

Recent US labor market data presented a mixed narrative that has caught market attention. Combined Nonfarm Payrolls figures for October and November revealed job market softness, with the Unemployment Rate rising to 4.6%—the highest level since September 2021. October saw the economy shed 105,000 positions, though November brought limited relief with just 64,000 new jobs created. Additional economic indicators reinforced this cautious picture: October Retail Sales came in flat month-on-month when growth of 0.1% had been expected, while preliminary S&P Global PMI data for December showed the Composite Index at 53.0, retreating notably from November’s 54.2.

Market analysts have suggested that this economic softness, while concerning from a cyclical perspective, is unlikely to sway the Federal Reserve from its current policy stance. The reasoning is straightforward: much of the data weakness reflects distortions from recent government shutdowns rather than fundamental economic deterioration. The CME FedWatch tool currently indicates minimal probability of rate cuts in January 2026, with markets instead pricing in policy continuity.

Looking ahead, investors are focused on November’s Consumer Price Index release scheduled for Thursday, which will provide crucial inflation signals that could influence rate expectations.

Technical Picture: USD/INR Holds Key Support Levels

From a technical standpoint, USD/INR is trading at 90.5370 on the daily chart, maintaining its position above the ascending 20-day Exponential Moving Average positioned at 90.1278. This technical arrangement preserves constructive conditions for the Dollar. The Relative Strength Index stands at 59.23, above the neutral 50 mark, confirming that positive momentum persists despite pullback from the elevated 70s region.

The 20-day EMA itself continues climbing, suggesting underlying strength in the USD/INR trend. As long as price action remains supported above this moving average, upside potential remains favored. The immediate support zone clusters around 89.9556–89.8364. Should USD/INR sustain a daily close below this area, the bias would shift toward consolidation rather than continuation. Conversely, any maintenance of bids above this support band would open the door for additional Dollar appreciation against the Rupee.

The Macroeconomic Framework Behind INR Movements

The Indian Rupee’s trajectory reflects sensitivity to multiple external variables simultaneously. Crude Oil prices matter enormously given India’s heavy import dependence on petroleum products. Dollar strength itself exerts outsized influence since most international trade flows are dollar-denominated. Foreign investment levels represent the third critical pillar affecting currency performance.

Central bank actions through RBI intervention and interest rate adjustments represent additional powerful transmission channels. The RBI employs forex market operations to maintain exchange rate stability, facilitating smoother trade flows. On the monetary front, the central bank targets 4% inflation through strategic rate management. Interest rate differentials matter significantly due to carry trade dynamics—investors borrow in low-rate jurisdictions to deploy capital in higher-yielding markets, capturing spread advantages. This mechanism means that elevated Indian rates typically support Rupee appreciation.

Broader macroeconomic conditions shape long-term currency trends. Inflation rates, economic growth measured by GDP expansion, trade balance positions, and FDI/FII flows all influence INR valuation. Stronger GDP growth typically attracts overseas investment, increasing Rupee demand. Improved trade balances naturally support currency strength. Real interest rates—nominal rates adjusted for inflation—benefit the Rupee when they rise. Risk-on market environments encourage both direct and indirect foreign investment inflows, providing currency support.

Conversely, elevated inflation relative to trading partners traditionally weakens the Rupee through devaluation mechanics. Higher inflation also raises export costs, requiring more Rupee selling to fund imported goods purchases. However, inflation can paradoxically support the currency if it prompts the RBI to raise nominal interest rates, attracting carry trade capital flows.