Indian Rupee Rebounds Sharply as Central Bank Steps In to Support Currency

The Indian Rupee staged a notable recovery against the US Dollar on Wednesday, with the USD/INR pair declining over 1% to approach the 90.00 level from its previous peak of 91.56. This rally came following active intervention by the Reserve Bank of India (RBI) across both the spot market and Non-deliverable Forward (NDF) segments. According to multiple market sources, state-run banking institutions were observed aggressively supplying US Dollars, ostensibly executing RBI directives to defend the domestic currency.

The timing of this intervention reflects growing concerns about the Rupee’s performance trajectory. Year-to-date, the Indian currency has depreciated nearly 6.45%, establishing itself as the weakest performer among Asian currencies versus the Greenback. The weakness stems from persistent foreign capital outflows, driven by the unresolved trade negotiations between the United States and India, which has simultaneously boosted demand for US Dollars among Indian importers.

Foreign institutional investors have accelerated their exit from Indian equities, maintaining net selling positions in seven of the first 11 months this year. December alone witnessed substantial stake liquidations valued at Rs. 23,455.75 crore. This capital flight underscores investor caution amid the prolonged trade policy uncertainty.

On the policy front, RBI Governor Sanjay Malhotra signaled a dovish stance during recent remarks, indicating that borrowing costs will “remain suppressed for an extended period.” He also acknowledged that recent GDP readings “caught the central bank off-guard,” necessitating improved forecasting methodologies. Notably, Malhotra estimated that a potential US-India trade resolution could contribute approximately 0.5% upside to overall GDP growth.

Dollar Index Steadies Despite Mixed Economic Signals

The US Dollar demonstrated resilience during Asian trading hours, with the Dollar Index (DXY) tracking 0.17% higher near 98.40. This stability emerged despite concerning labor market developments. The combined payroll report for October and November revealed unemployment climbing to 4.6%, the highest reading since September 2021, while net job creation totaled negative 41,000 positions across the two-month period.

Consumer spending data painted an equally underwhelming picture, with October retail sales remaining flat against expectations for 0.1% growth. Private sector activity measured through the Composite PMI slowed to 53.0 from 54.2 previously, reflecting moderating economic momentum. However, analysts note that government shutdown distortions make these figures less reliable for Federal Reserve policy interpretation.

Market participants currently assign minimal probability to Fed rate cuts at the January 2026 meeting based on CME FedWatch data. Attention will shift toward November Consumer Price Index figures scheduled for Thursday’s release, which could provide clearer signals on the inflation trajectory independent of temporary statistical noise.

Technical Setup: USD/INR Consolidates Above Key Support

The daily timeframe shows USD/INR trading at 90.5370, maintaining position above the 20-day Exponential Moving Average positioned at 90.1278. The uptrend structure remains intact with the moving average continuing its upward slope. The Relative Strength Index at 59.23 sits comfortably above the 50 centerline, validating positive momentum without extreme overbought conditions that typically precede corrections.

Should USD/INR fall below the immediate support cluster spanning 89.9556–89.8364, the technical bias would shift toward consolidation rather than fresh directional commitment. Conversely, sustained bids above this moving-average foundation would preserve bullish potential with scope for additional appreciation. The current setup suggests that while momentum has moderated from recent peaks, the underlying trend bias favors continuation above support levels.

Understanding Indian Rupee Drivers

The Rupee exhibits pronounced sensitivity to external variables, with several macro factors exerting decisive influence. Crude oil pricing matters considerably given India’s substantial import dependence, while US Dollar strength affects competitiveness since international commerce predominantly occurs in the greenback. Foreign investment flows represent another critical variable shaping currency direction.

The RBI employs two primary mechanisms to stabilize the exchange rate: direct forex market intervention and interest rate adjustments. Elevated borrowing costs typically strengthen the Rupee through the carry-trade channel—international investors borrow at lower rates in developed markets and deploy capital in India to capture the interest rate differential. To contextualize currency strength: at current exchange rates near 90 rupees per dollar, 2000 US dollars converts to approximately 180,000 rupees, illustrating the magnitude of recent rupee appreciation from the 91.56 peak.

Fundamental economic indicators influencing Rupee trajectory include inflation dynamics, real interest rates (nominal rates minus inflation), GDP growth acceleration, trade account balances, and capital inflows. Elevated economic expansion typically attracts overseas investment, increasing Rupee demand. Similarly, narrowing trade deficits mechanically reduce the supply of rupees flooding FX markets. Real interest rate differentials prove particularly potent—when Indian rates exceed peer economies on an inflation-adjusted basis, demand from yield-seeking international investors intensifies.

The inflation factor cuts both directions: elevated price pressures devalue currencies through oversupply dynamics and increase export costs, forcing exporters to sell more rupees to procure foreign supplies. Simultaneously, inflation often triggers RBI rate hikes, which can provide offsetting support through interest rate attraction for external investors. Risk sentiment matters considerably too—during risk-on environments, FDI and FII flows surge, strengthening the Rupee, while risk-off episodes reverse these flows with negative currency consequences.