RBI Support Counters US Yield Surge as Rupee Holds 96

Key Moments

RBI Activity Helps Rupee Defend Key Level

The Indian Rupee (INR) is posting modest gains against the US Dollar (USD) on Friday, recovering part of its recent losses. The USD/INR pair is finding it difficult to sustain upside traction above 95.96, with market participants pointing to likely intervention from the Reserve Bank of India (RBI) as a key factor limiting further gains in the pair.

A Reuters report, citing four traders, indicated that India’s central bank likely sold US Dollars before the onshore spot market opened on Friday. This activity reportedly helped the Rupee stay stronger than the closely watched 96-per-dollar mark, a level seen as psychologically important for market sentiment.

Even so, the Rupee’s rebound appears tentative, as global forces remain unfavorable. Elevated US Treasury yields, driven by higher energy prices and the Federal Reserve’s guidance for interest rates to remain higher for longer, continue to create headwinds for emerging market currencies.

The MCX Crude Oil contract expiring on October 19 is trading 2.3% lower near Rs. 8,950 at the time of writing, after sharp gains over the previous two sessions. Meanwhile, 10-year US Treasury yields are hovering close to the 19-year high of 5.23% reached on Thursday. Such yield levels are dampening appetite for risk-sensitive assets, including equities and currencies like the INR.

US Yield Repricing Pressures Risk Assets and Asia FX

Analysts at MUFG emphasize that the “dominant market theme remains the relentless rise in US yields and the renewed repricing of Fed expectations.” They highlight that Treasury yields “moved sharply higher as strong US activity data and rising energy prices reinforced concerns that inflation could prove more persistent.”

In their latest commentary, MUFG notes that the “US 2-year Treasury yield jumped 14bp to around 4.9%, while the 10-year yield rose above 5.0% and the 30-year yield climbed beyond 5.4%.”

Against this backdrop, MUFG underscores that “markets now price around 37bp of additional Fed tightening by December 2026, equivalent to roughly 1.5 rate hikes by year-end.” The bank warns that this “economic resilience raises the risk that policymakers may need to do more to prevent inflation pressures from becoming entrenched,” creating a tougher backdrop for risk assets in general and Asian foreign exchange in particular.

India’s Inflation Trajectory Supports a Hawkish RBI Bias

On the domestic front, MUFG analysts point to rising price pressures in India as another important driver for policy expectations. They note that India’s August inflation “rose 4.8% yoy (DBSf 4.9%) from a revised 4.5% month before, firmest since December 2024,” signaling a noticeable strengthening in inflation dynamics.

According to MUFG, “a gradual broadening of price pressures is likely to keep headline inflation above 5% in second half of the fiscal year, underscoring the need for a tighter policy bias.” The analysts argue that “recent developments, including a sustained rise in crude prices, tightening global financial conditions, firm domestic growth and signs of broadening in core pressures, strengthen the case for a shallow 50bp hike in second half of FY27, making October’s meeting a live one.”