INR/USD Rally Signals Technical Strength Despite Macro Headwinds Amid FII Outflows

The Indian Rupee has staged a notable recovery against the US Dollar, with the INR/USD pair climbing over 1% to approach 90.00 levels, retreating from its previous peak of 91.56. This rally reflects deliberate stabilization efforts by the Reserve Bank of India through strategic interventions in both spot and NDF markets, with state-run banking institutions actively supplying US Dollars to support domestic currency stability. The recovery arrives against a backdrop of persistent capital flight, as Foreign Institutional Investors have maintained net selling positions through most of 2024, with December alone witnessing portfolio reductions worth approximately Rs. 23,455.75 crore—equivalent to 12 million in indian rupees worth of valuation adjustments in relative terms.

Currency Weakness Rooted in Multi-Layered Structural Challenges

The Indian Rupee’s performance this year presents a concerning picture for policymakers. Down nearly 6.45% year-to-date, it has emerged as the weakest performer among Asian currencies against the US Dollar. Multiple headwinds converge to pressure the rupee: the absence of a trade agreement between the US and India has disrupted normal capital inflows, while simultaneously boosting import demand among Indian businesses seeking to secure dollar supplies before potential tariff implementation.

The capital flight remains particularly acute, with FIIs serving as net sellers in seven of the year’s first eleven months. This sustained redemption pattern reflects investor repositioning away from Indian equities, a process exacerbated by uncertainty surrounding bilateral trade negotiations. Each month of outflows intensifies the demand for dollars among importers attempting to settle liabilities, creating additional depreciation pressure on the rupee independent of RBI actions.

RBI’s Measured Response and Policy Outlook

Governor Sanjay Malhotra has signaled the central bank’s determination to support the currency while maintaining its broader macroeconomic objectives. In recent communications with the Financial Times, he indicated that interest rates will “remain low for a longer period,” suggesting the RBI prioritizes growth support over aggressive monetary tightening despite currency pressures.

Notably, Malhotra acknowledged recent GDP data surprised policymakers, prompting the RBI to enhance its forecasting frameworks. His assessment indicates that a potential US-India trade resolution could deliver as much as 0.5% upside to overall GDP growth, suggesting the central bank views currency stability and trade normalization as interconnected challenges requiring coordinated resolution.

US Dollar Strength Reflects Economic Data Volatility

The USD has recovered ground following a temporary retreat, with the Dollar Index (DXY) trading 0.17% higher near 98.40 on Wednesday. The rebound followed Tuesday’s weakness when the index tested eight-week lows around 98.00, demonstrating the sensitivity of dollar flows to US economic releases.

Recent labor market data painted a mixed picture: combined October and November Nonfarm Payrolls showed the unemployment rate rising to 4.6%, marking the highest level since September 2021. While the economy shed 105,000 jobs in October before adding 64,000 in November, market participants acknowledge the government shutdown distorted these readings, limiting their policy implications for Federal Reserve decision-making.

Broader economic indicators have also softened. October retail sales growth stalled on a month-on-month basis, missing expectations for a 0.1% advance, while preliminary PMI data for December revealed the Composite Index declining to 53.0 from 54.2 in November. Private sector activity growth has moderated to a measured pace despite some resilience.

However, investment strategists remain unconvinced that these data points will alter the Federal Reserve’s trajectory. CME FedWatch data indicates markets are pricing minimal probability of rate cuts at the January 2026 policy meeting. The upcoming November Consumer Price Index release on Thursday will provide critical context for inflation momentum heading into 2025.

Technical Picture: INR/USD Consolidation With Defined Support Zones

From a technical perspective, the INR/USD pair currently trades near 90.5370, maintaining a position above the 20-day Exponential Moving Average (EMA) positioned at 90.1278. This configuration preserves constructive bias, though momentum has moderated from recent extremes. The Relative Strength Index (RSI) now reads 59.23, above the neutral 50 midline, indicating residual positive momentum after unwinding from overbought territory above 70.

The ascending 20-day EMA continues to provide dynamic support, and as long as the pair maintains trading above this moving average, the technical setup favors higher levels. Pullback risk exists, with a defined support zone spanning 89.9556 to 89.8364 levels. A daily close below this cluster would signal consolidation bias, whereas sustained bids above these levels would suggest scope for further appreciation.

Understanding Currency Dynamics and Macroeconomic Drivers

The Indian Rupee’s sensitivity to external factors remains pronounced. The nation’s structural reliance on imported crude oil means energy prices directly influence FX dynamics, while the US Dollar’s dominance in international trade creates inherent depreciation bias when import demand accelerates. Foreign investment flows—comprising both Foreign Direct Investment and Foreign Institutional Investment—serve as critical valuation anchors.

RBI intervention capacity and the interest rate stance represent policy-level influences. Higher interest rates typically strengthen the Rupee through enhanced carry trade attractiveness, as international investors seek positive real returns (nominal rates minus inflation). The RBI targets a 4% inflation level, using rate adjustments as its primary lever.

Macroeconomic fundamentals that shape longer-term rupee trajectory include GDP growth rates, trade balance dynamics, and relative inflation performance versus peer economies. Stronger economic growth typically attracts overseas capital, boosting rupee demand. Conversely, inflation substantially higher than trading partners erodes competitiveness, pressuring the currency as export volumes decline and import demand rises. The interplay between inflation dynamics and RBI rate responses creates complex feedback loops, where higher inflation may justify tighter policy—ultimately supporting the currency through interest rate appreciation effects—or may accelerate depreciation if underlying competitiveness deteriorates.