The Indian rupee on Wednesday, saw a slight dip as it was down 0.1% on the day closing at 89.78 against the US Dollar. The currency had opened at a high note of 89.65 and then fell to 89.77 in the afternoon session before closing at the said level.
Traders have said the currency is likely to rebound by early 2026 owing to a weak dollar index and liquidity measures announced by RBI. Here is what is likely to drive the currency:
1.Dollar index slides to multi-month low
The dollar index, which measures the value of the US dollar against a basket of six major currencies, fell to 97.7, marking its lowest level since October. The fall has been signalled by growing expectations of two rate cuts by the US Federal Reserve in 2026 and cooling inflation conditions in the US economy.
2. RBI’s liquidity measures
The central bank, in a press release on Tuesday, announced liquidity measures which include bond purchases through open market operations (OMO) and a dollar-rupee buy-sell swap from January 13. Currency experts added that these measures will also infuse rupee liquidity into the banking system by pulling out excess dollars.
“Considering outflows on account of GST and advance tax, along with currency leakage, OMOs worth Rs 2 lakh crore were essential. The RBI likely intervened with over $5 billion in dollar sales to maintain the rupee within the 89–90 range, creating a need for further liquidity support,” said Madhavankutty G, Chief Economist at Canara Bank, as quoted by Financial Express.
3. RBI Governor provides confidence for the Indian rupee
“We are well poised to meet all our external requirements and so the rupee should be at a level which supports our Indian economy,” RBI Governor Sanjay Malhotra said in an interview with India Today.
He further added that the central bank does not have any specific exchange rate levels and will only intervene to curb excessive volatility in the currency.
4. Foreign funds make a return
As the rupee bounced back from record lows, FIIs made a strong comeback to the Indian equity market last week. Over the past week, as the rupee marked its biggest gain in six months, FPI flows rose by $644 million.
Before the turnaround, FPIs had pulled out about $1.8 billion over the previous three weeks.
5. Rupee outlook
“As long as USD/INR holds above 88.80, the broader medium-term structure remains range-bound with an upward bias, influenced by global dollar dynamics and domestic flow considerations,” said Ponmudi R, CEO of Enrich Money.
He further added that a sustained move above 90.00 could revive upside momentum toward 91.00 in the near term, while any improvement in trade dynamics or renewed foreign inflows may act as a limiting factor for further upside.
