Indian Rupee Steadies as RBI Steps Up Currency Support Amid Trade Headwinds

The Indian Rupee (INR) begins Thursday’s session with minimal movement against the US Dollar (USD), with the USD/INR exchange rate hovering near 90.80 levels. Market participants are positioned cautiously, anticipating fresh intervention from the Reserve Bank of India (RBI) to stem further depreciation of the domestic currency. Trading desks report a “high probability” of central bank action today, according to sources tracked by Reuters. Wednesday witnessed aggressive RBI dollar sales across both spot and non-deliverable forward markets, successfully capping the pair’s upward momentum when it briefly climbed to 91.55—a fresh record. Converting this to local terms, 1m in rupees translates to approximately 91.55 crore at these exchange levels, reflecting the scale of currency depreciation concerns.

The Rupee’s extended weakness stems from sustained portfolio outflows by Foreign Institutional Investors (FIIs), who have been consistently trimming positions in Indian equities amid the prolonged US-India trade negotiations stalemate. However, Wednesday brought a notable shift: FIIs switched to net buying mode for the first time this month, accumulating Rs. 1,171.71 crore in shares. This reversal could inject temporary optimism into risk sentiment, though momentum sustainability remains questionable without a concrete trade agreement announcement.

Technical Positioning: Rising Moving Average Provides Support Floor

From a technical standpoint, USD/INR continues to trade above its 20-day exponential moving average positioned at 90.2106, preserving the pair’s underlying bullish structure. The moving average’s upward trajectory prevents pullbacks from gaining significant traction. The Relative Strength Index (RSI) sits at 63.40, maintaining bullish character after moderating from overbought extremes. This configuration suggests bulls retain command as long as daily closes remain anchored above the 20-day EMA, with any dips anticipated to find buying interest in that zone. RSI movement toward the mid-60s would reinforce trend continuity, whereas a slide toward 50 would signal weakening momentum. A definitive break below the moving average would neutralize the bias and potentially trigger a deeper correction.

Dollar Dynamics Shaped by Fed Policy Signals and Inflation Data

The USD/INR sideways consolidation also mirrors broader US Dollar weakness. The US Dollar Index (DXY), measuring the Greenback’s performance against six major trading partners, hovers marginally higher near 98.45. Fed-related developments have been instrumental: markets have recently repriced expectations for near-term rate reductions following statements from Fed Chair Jerome Powell that raised the bar for additional cuts. The CME FedWatch tool currently estimates just 24.4% probability of a 25 basis point reduction to the 3.25%-3.50% range at January’s meeting.

Market participants remain hesitant to amplify dovish Federal Reserve bets. Powell’s recent communications emphasized that scope for additional monetary accommodation is constrained. However, incoming commentary regarding Powell’s successor suggests a possible pivot toward easier policy, potentially aligned with incoming administration preferences for lower rates. President Trump stated this week that the new Fed chairman will “believe in lower interest rates, by a lot,” a statement that could undermine central bank independence and weigh on the Greenback’s valuation.

Today’s focus centers on November’s US Consumer Price Index (CPI) release, scheduled for 13:30 GMT. Both headline and core inflation metrics are anticipated at 3.0% annualized growth, with these figures likely to reset market expectations around the Fed’s medium-term rate trajectory.

Understanding Rupee Drivers and Reserve Bank Management

The Indian Rupee ranks among the most externally-sensitive currencies globally, responding acutely to crude oil price movements (given India’s heavy import dependence), fluctuations in US Dollar strength (as USD dominates international trade), and shifts in foreign capital flows. RBI’s discretionary forex market interventions play a critical role in stabilizing the exchange rate to support commerce, while interest rate decisions function as a secondary policy tool targeting the 4% inflation objective.

When the RBI raises benchmark rates, the Rupee typically appreciates through the carry trade mechanism—foreign investors borrow at lower rates internationally to deploy capital in higher-yielding rupee assets, generating arbitrage profits. Conversely, macroeconomic conditions such as inflation, growth rates, trade balance positions, and cross-border investment flows exert significant influence. Faster GDP expansion attracts overseas capital, strengthening demand for rupees. Improved trade balance dynamics support currency appreciation. Elevated real interest rates (nominal rates minus inflation) attract foreign investors seeking returns. Risk-on environments amplify FDI and FII inflows, benefiting the Rupee. Elevated inflation—particularly if exceeding peer economies—reflects currency devaluation through excess supply and raises export costs, requiring more rupee sales for foreign purchases. Paradoxically, inflation-driven rate increases by the RBI can support the currency through heightened international investor demand.