Indian Rupee Rebounds as Central Bank Action Supports Currency Stability Against the Dollar

The Reserve Bank of India’s direct market intervention has triggered a notable reversal in the USD/INR pair during Wednesday’s trading session. After climbing to an all-time peak of 91.56, the exchange rate has retreated to approximately 90.00, representing a decline exceeding 1%. This corrective move reflects aggressive dollar supply from state-run banking institutions, acting as agents of the RBI according to market sources who spoke with Reuters.

The backdrop to this intervention highlights the Indian Rupee’s challenging year. As Asia’s weakest performing currency against the US Dollar, INR has depreciated nearly 6.45% year-to-date. The currency weakness stems from multiple headwinds: sustained capital outflows from Indian equities due to unresolved US-India trade negotiations, increased dollar demand from Indian importers navigating the trade stalemate, and a consistent pattern of Foreign Institutional Investor (FII) redemptions. December alone witnessed FII redemptions totaling Rs. 23,455.75 crore from Indian equity markets, continuing a seven-out-of-eleven-month net selling trend.

Policy Signals and Economic Outlook

RBI Governor Sanjay Malhotra recently signaled monetary accommodation through an interview with the Financial Times, indicating that interest rates will “persist at lower levels throughout an extended timeframe.” Malhotra characterized the latest GDP figure as “surprising,” prompting the RBI to recalibrate its forecasting models. Notably, the central bank estimates potential GDP impact from a US-India trade resolution at approximately 0.5%.

Daily Market Momentum: Dollar Strength Despite Mixed Economic Signals

While the USD/INR pair faces downward pressure from intervention efforts, the broader US Dollar Index (DXY) demonstrates resilience, trading 0.17% higher near 98.40. This recovery follows Tuesday’s rebound from an eight-week trough near 98.00.

Recent US economic data painted a complex picture. The combined October-November Nonfarm Payrolls report showed unemployment rising to 4.6%—the highest level since September 2021—with employment declining by 105,000 in October before recovering 64,000 positions in November. Retail Sales for October came in flat against expectations of 0.1% monthly growth, while December’s flash Composite PMI measured 53.0, significantly below November’s 54.2.

Market analysts note that data distortions from government shutdowns likely prevent these readings from meaningfully altering Federal Reserve policy expectations. The CME FedWatch tool currently suggests minimal probability of rate cuts at the January 2026 FOMC meeting. Investors will now direct attention to November’s Consumer Price Index release scheduled for Thursday, with implications for both USD strength and emerging market currency valuations including the Indian Rupee.

Technical Positioning: USD/INR Stabilizes Near Moving Average Support

The daily chart shows USD/INR consolidating at 90.5370, maintaining above the rising 20-day Exponential Moving Average at 90.1278. The Relative Strength Index (RSI) trades at 59.23, above the neutral 50 level, confirming sustained bullish momentum despite recent moderation from overbought extremes.

The 20-day EMA serves as the immediate support floor, with a broader support band spanning 89.9556 to 89.8364. While short-term momentum has decelerated, trend conditions remain constructive above this technical cluster. A daily close penetrating below 89.8364 would signal a shift toward range-bound consolidation. Conversely, sustained positioning above this zone maintains the potential for USD/INR extension higher, though immediate volatility may persist near current levels.

What Drives Indian Rupee Movements?

The Indian Rupee operates within a framework of external sensitivity, responding to multiple macroeconomic variables. Crude Oil pricing carries outsized influence given India’s import dependency, while US Dollar strength and foreign investment flows fundamentally shape INR trajectories. Direct RBI intervention in foreign exchange markets—as demonstrated Wednesday—represents a structural stabilizing mechanism, alongside monetary policy adjustments.

Interest rate differentials significantly impact currency flows through carry-trade mechanisms. When RBI maintains elevated rate levels, international investors gain incentive to deploy capital in rupee assets, strengthening demand for the currency. Conversely, inflation dynamics work bidirectionally: elevated price growth erodes competitiveness and increases import costs, pressuring the Rupee, yet simultaneously may trigger RBI rate hikes that attract foreign capital inflows.

Broader macroeconomic health indicators—including GDP growth rates, trade balances, and foreign investment climate—establish the foundational environment for Rupee valuation. Risk-on sentiment typically amplifies inflows of Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII), supporting currency appreciation. In contrast, elevated inflation relative to trading partners undermines Rupee strength through competitiveness channels.