Rupee Hits Six-Week Peak as Soft USD and RBI Support

Key Moments

Dollar Weakness Lifts Rupee to New Six-Week High

The Indian Rupee started Wednesday’s session on a firm footing against the US Dollar following a holiday-impacted break in trading. The USD/INR pair slipped to a new six-week low near 96.55, reflecting ongoing softness in the Greenback.

The US Dollar Index (DXY), which measures the Dollar against six major peers, was nearly unchanged around 101.77 at the time of writing, yet remained close to the almost three-week low of 101.50 registered the previous day.

The Dollar’s weakness has been linked to declines in US Artificial Intelligence-related stocks and a corrective move in US bond yields amid shifting expectations around Federal Reserve policy. These factors have encouraged market participants to anticipate further downside in the US currency.

Market Repricing of Fed Risk and Tech Nerves Pressure the Dollar

Strategists at Scotiabank noted that “broad USD weakness looks poised to extend in the short run as markets reassess near-term Fed tightening risks,” highlighting last week’s “heavy net losses for the DXY” as a sign that the “Sep/Oct rally in the index is poised to correct or reverse, potentially towards the 100.80/101.30 area at least.” They further commented that “a deeper shake out in tech stocks could become a further headwind for the USD, given the dominance of the AI build out in the US growth/inflation narrative,” indicating that renewed sector pressure may reinforce the ongoing Dollar downtrend.

Data from the CME FedWatch tool indicated that the Federal Reserve was seen as almost certain to keep rates unchanged at its upcoming policy meeting later this month. A month earlier, the same tool had reflected a meaningful probability of another rate increase at the October meeting. Traders scaled back expectations for additional tightening after several Fed officials signaled there was no urgency for another hike.

RBI’s Multi-Layered Rupee Defense in Focus

Economists at DBS Group Research emphasized that the Reserve Bank of India has pursued a “multi-layered defence strategy to support the rupee this year,” combining “outright intervention in spot/forwards, regulatory action, liquidity steps, administrative measures and moves to curb import-related dollar demand.”

DBS said policymakers are “likely not done yet and remain ready to take further action, as required,” citing RBI Governor Malhotra’s recent remarks that “The RBI is determined to do whatever is necessary to ensure orderly movement in the foreign exchange market.”

Despite these efforts, DBS expressed skepticism about the Rupee’s ability to sustain significant appreciation. The research house stated that even with recent measures, “we see limited room for sustained INR appreciation on grounds of manufacturing/trade competitiveness.” It added that “a challenging portfolio flows outlook leaves the door open to further gradual rupee depreciation subject to global developments,” and pointed to the Rupee’s “high sensitivity to oil price movements and risk sentiments.”

Technical Picture: Further USD/INR Declines Eyed Toward 94.15

On the technical front, USD/INR was trading around 94.55 on the daily chart, maintaining a bearish short-term profile as spot remained well below the 20-period Exponential Moving Average (EMA) at 95.5079.

The pair has retreated sharply from recent highs. While the Relative Strength Index (RSI) stood at 28.47, indicating oversold conditions, this signal was seen as suggesting stretched downside rather than an imminent reversal, with price action still constrained by overhead trend resistance.

On the upside, immediate resistance was identified at the 20-period EMA near 95.51, where any recovery attempt would likely encounter renewed selling interest. On the downside, the June 25 low at 94.15 was viewed as the key support level.

Indian Rupee: Key Drivers and Macro Backdrop

The Indian Rupee is described as highly responsive to external influences. Major drivers include crude Oil prices, the value of the US Dollar – given that most trade is conducted in USD – and the scale of foreign investment flows. Actions by the Reserve Bank of India in the foreign exchange market to stabilize the currency, along with its interest rate decisions, are also significant determinants.

The RBI seeks to maintain a stable exchange rate to support trade and aims to keep inflation near a 4% target via interest rate policy. Higher interest rates typically bolster the Rupee due to the carry trade, in which investors borrow in low-rate jurisdictions to invest in markets offering relatively higher yields.

Macroeconomic variables shaping the Rupee’s value include inflation, interest rates, GDP growth, the trade balance, and foreign investment inflows. Stronger economic growth can draw more overseas capital, supporting the currency, while an improving trade position is also Rupee-positive. Higher, especially positive real interest rates tend to favor the Rupee, and a risk-on environment can help by boosting Foreign Direct Investment and Foreign Institutional Investment.

Inflation plays a dual role. Elevated inflation, particularly if higher than in peer economies, is generally negative for the Rupee because it implies devaluation and raises export costs, which can spur greater demand for foreign currencies to finance imports. At the same time, higher inflation often prompts the RBI to lift interest rates, which can attract foreign investors and support the Rupee. The reverse is true when inflation is lower.