RBI's Support Cushions INR Volatility Amid Trade Tensions

The Indian Rupee strengthened notably against the US Dollar on Wednesday morning, with the USD/INR pair retreating sharply over 1% to near 90.00 levels after hitting an all-time peak of 91.56. This recovery reflects aggressive intervention by the Reserve Bank of India (RBI) across both spot and Non-deliverable Forward (NDF) markets. According to market sources, state-run banks actively supplied US dollars—likely coordinated by the RBI—signaling commitment to support the domestic currency. The Rupee’s recent weakness has been pronounced within Asia, marking it as the region’s worst performer against the US Dollar with a year-to-date depreciation of approximately 6.45%.

Structural Headwinds Weighing on INR

The weakness in India’s currency stems from multiple concurrent pressures. Stalled trade negotiations between the US and India have dried up foreign fund inflows, with Foreign Institutional Investors remaining net sellers in seven of the eleven months through December. The December exodus was particularly severe, with FIIs offloading stakes valued at Rs. 23,455.75 crore from Indian equities. This outflow dynamic has compounded the Rupee’s struggles, while simultaneously boosting demand for US Dollars among Indian importers navigating the trade impasse.

On the policy front, RBI Governor Sanjay Malhotra signaled in a Financial Times interview that the central bank will maintain accommodative monetary conditions, keeping interest rates “low for an extended period.” Malhotra also highlighted surprise in recent GDP figures, prompting the RBI to recalibrate forecasting models. Notably, he indicated that a potential US-India trade resolution could add up to 0.5% to India’s overall GDP growth.

Broader Dollar Recovery Takes Shape

The US Dollar rebounded during Wednesday’s Asian session, with the Dollar Index (DXY) gaining 0.17% to trade near 98.40, extending its Tuesday recovery from an eight-week bottom around 98.00. Fresh labor market data revealed that the combined Nonfarm Payrolls report for October-November showed job creation of 64K in November following a 105K shedding in October, while the Unemployment Rate climbed to 4.6%—the highest since September 2021.

Concurrent economic indicators painted a softer picture. October Retail Sales remained flat month-on-month against expectations of 0.1% growth, while the Composite PMI for December’s private sector activity dropped to 53.0 from 54.2 previously. Despite these weaker readings, market participants largely attribute the data softness to government shutdown distortions rather than fundamental economic deterioration. The CME FedWatch tool currently shows minimal probability of Fed rate cuts at the January 2026 meeting. Attention will now pivot to November’s Consumer Price Index data, due Thursday.

Technical Setup: USD/INR Consolidates Above Key Support

At current levels of 90.5370, USD/INR maintains a position above the ascending 20-day Exponential Moving Average (EMA) positioned at 90.1278, preserving bullish structure. The Relative Strength Index reading of 59.23 sits comfortably above the 50 midline, confirming sustained positive momentum despite moderating from overbought extremes in the 70s.

Immediate support forms at the 20-EMA level of 90.1278, with a secondary support zone spanning 89.9556–89.8364 across the moving-average cluster. A daily close below this lower band would signal shift toward consolidation; however, sustained closes above this zone would open pathways for further appreciation.

Currency Dynamics: What Drives the Rupee?

The Rupee ranks among Asia’s most externally-sensitive currencies, responding dynamically to crude oil prices (critical given India’s import dependency), the US Dollar’s trajectory, and foreign investment flows. Within Asia, the Rupee’s relative performance varies significantly—while it currently struggles against the US Dollar, valuations shift considerably when comparing the Rupee to other emerging market currencies where it frequently trades stronger in certain economic regimes.

Direct RBI intervention in foreign exchange markets remains instrumental in maintaining exchange rate stability and facilitating trade continuity. The central bank also employs interest rate adjustments targeting a 4% inflation objective. Higher rates typically strengthen the Rupee through carry trade mechanics, whereby international investors borrow at lower rates in developed markets to deploy capital in higher-yielding Indian assets, capturing the interest rate differential.

Macroeconomic architecture influencing Rupee valuation encompasses inflation dynamics, policy rates, GDP growth trajectory, trade balance composition, and overseas investment inflows. Accelerating economic growth attracts foreign capital, increasing Rupee demand. Improving trade deficits reduce supply pressure on the currency. Positive real rates—nominal rates minus inflation—historically support currency strength. In a risk-on environment, heightened flows of Foreign Direct and Indirect Investment (FDI and FII) buoy the currency. Conversely, above-trend inflation (particularly relative to peers) typically pressures the Rupee through devaluation dynamics and export cost inflation, though RBI rate responses can partially offset these headwinds.