Indian Rupee Strengthens on RBI Market Support as USD/INR Slips Below 90.00

RBI Steps Into Forex Markets to Shore Up Domestic Currency

The Indian Rupee mounted a significant recovery against the US Dollar during Wednesday’s Asian session, with the USD/INR exchange rate diving more than 1% to break below the 90.00 psychological level. The currency pair had previously scaled an all-time peak of 91.56, making Wednesday’s pullback particularly noteworthy for traders monitoring the pair.

The Rupee’s turnaround was directly attributable to deliberate action by the Reserve Bank of India in both spot and Non-deliverable Forward (NDF) markets. Market participants reported that state-owned banking institutions were actively supplying substantial quantities of US Dollars—ostensibly representing RBI’s broader intervention strategy. Three separate traders confirmed these observations to Reuters, highlighting the central bank’s determination to prevent further deterioration of Asia’s worst-performing currency against the Greenback.

The RBI’s decision to intervene reflects growing concerns over the Rupee’s year-to-date performance, which has deteriorated by approximately 6.45%. This weakness stems from multiple structural headwinds: a prolonged standstill in US-India trade negotiations has dried up the flow of foreign investment, while simultaneous increases in Dollar demand from Indian importers have added further downward pressure on the currency.

Capital Flight and Policy Positioning

The foreign investment landscape remains decidedly unfavorable for the Rupee. Foreign Institutional Investors have posted net outflows during seven of the first eleven months this year. December’s figures painted an especially grim picture, with FIIs reducing their Indian equity holdings by Rs. 23,455.75 crore—a massive volume in any million Indian rupees equivalent that underscores the severity of capital withdrawal from Indian markets.

Against this backdrop, RBI Governor Sanjay Malhotra recently communicated to the Financial Times that monetary policy rates will maintain an accommodative stance “for an extended timeframe.” Notably, Malhotra characterized the latest GDP growth reading as “unexpected,” prompting the central bank to recalibrate its economic forecasting models. The Governor suggested that a potential US-India trade agreement could generate positive GDP effects reaching as high as 0.5% for the overall economy—indicating that resolution of the trade stalemate could provide meaningful economic benefits.

USD Rally Encounters Headwinds Despite Weak Data

Meanwhile, the US Dollar mounted a comeback during Wednesday’s Asian hours, partially reversing Tuesday’s losses. The Dollar Index (DXY), which measures the Greenback against six major trading partners, climbed 0.17% to hover near 98.40, having previously struck a fresh eight-week trough close to 98.00 on the previous session.

The Dollar’s rebound occurred amid the release of troubling American employment figures. The combined October-November Nonfarm Payrolls report revealed that the US unemployment rate had risen to 4.6%—the highest reading since September 2021. The data showed job losses of 105K in October subsequently partially offset by 64K new positions created in November.

Supporting economic indicators presented an equally disappointing picture. October Retail Sales remained completely flat month-on-month when modest 0.1% growth had been anticipated. The December flash Composite PMI for private sector activity registered 53.0—a substantial decline from November’s 54.2 reading, suggesting that business activity momentum is cooling across the board.

Market Interpretation and Rate Cut Outlook

Financial market analysts have largely dismissed the weak US data as carrying meaningful implications for Federal Reserve policy decisions. Most observers attribute the soft statistics to distortions stemming from the recent US government shutdown, viewing this period as an unreliable guide to true economic momentum.

Current market pricing, as reflected in CME FedWatch tool calculations, suggests negligible probability of a Fed rate cut at the January 2026 monetary policy decision. Attention among investors will now sharply focus on the November Consumer Price Index report, scheduled for Thursday release—data that could prove more determinative for rate path expectations.

Technical Picture: USD/INR Consolidating Above Key Moving Average

From a technical perspective, USD/INR currently trades at 90.5370, maintaining a position above the ascending 20-day Exponential Moving Average positioned at 90.1278. This positioning preserves the broader bullish bias that has characterized recent price action, despite the sharp Wednesday decline.

The Relative Strength Index sits at 59.23, comfortably above the 50 midline, confirming that positive momentum remains intact following a pullback from previous overbought extremes in the 70s range. The primary support pillar for the pair remains the 20-day EMA level at 90.1278—as long as the pair trades above this threshold, upside continuation scenarios remain favored.

A critical support zone spans the broader 20-EMA cluster between 89.9556 and 89.8364. Should USD/INR close the daily session beneath this zone, the technical picture would shift toward consolidation dynamics. Conversely, if the pair maintains its position above this support band, traders should monitor for potential extensions toward higher levels as the trend remains underpinned by the ascending moving average structure.

Understanding Rupee Drivers: What Moves the Indian Currency

The Indian Rupee responds sensitively to multiple external variables that global forex participants must monitor. Crude Oil prices—critical given India’s substantial import dependency—represent one pillar. The US Dollar valuation itself constitutes another crucial lever, since international commerce predominantly uses USD as the settlement currency. The quantum and direction of foreign capital flows represent the third key variable shaping Rupee dynamics.

The RBI implements continuous active management within foreign exchange markets, deploying intervention to maintain orderly exchange rate conditions that facilitate bilateral trade. Simultaneously, the central bank calibrates its interest rate settings to target inflation near the 4% objective, recognizing that rate adjustments directly influence currency valuations. Higher interest rates typically strengthen the Rupee by activating the carry trade mechanism—where international investors borrow in low-yielding jurisdictions to deploy capital in higher-yielding markets, capturing the spread differential.

Macroeconomic fundamentals providing deeper context include the inflation trajectory, interest rate environment, economic growth expansion (GDP), the trade balance position, and the magnitude of foreign direct and portfolio investment inflows. Robust GDP growth attracts increased overseas capital allocation, boosting Rupee demand. Trade balance improvements where imports fall relative to exports similarly support the currency. Real interest rates—nominal rates adjusted for inflation—demonstrate especially powerful effects on currency strength. Risk-on market sentiment amplifies both FDI and FII inflows, which provide additional Rupee support.

Conversely, elevated inflation particularly exceeding peer economies typically weighs on the Rupee, reflecting currency devaluation through excess money supply. Inflation simultaneously raises export costs, forcing Indian exporters to sell larger quantities of Rupees to purchase foreign goods, creating downward currency pressure. However, central bank rate increases undertaken to combat inflation can paradoxically strengthen the Rupee by attracting international investors seeking higher returns, partially offsetting the negative inflation effect.