After a rough start, the week ended on a rather positive note for the rupee. It saw one of its biggest recoveries in over three years, gaining nearly 2%.
The Indian currency closed at 89.27, up 1.1% from Thursday’s close of 90.24 against the US dollar. This marks a sharp recovery for the currency, as just three days earlier, on December 16, it had breached the 91-level mark. The rupee has appreciated by nearly 2% from its historic low of 91.08.
Here are the four factors that help stage rupee’s recovery
1. RBI intervention
In the afternoon session, the rupee was trading at the 90.19 level against the US dollar and hit a high of 89.25 before closing at 89.27.
The currency’s recovery is largely being attributed to heavy intervention by the RBI. Traders quoted by Reuters said that large state-run banks sold dollars heavily on behalf of the central bank, which lifted the currency.
“Rupee was moving smoothly between 89.95 and 90.40 when the RBI tsunami hit the market and the rupee surged to a high of 89 before closing at 89.27. All this happened in the last three minutes, which caused huge volatility in the markets,” Moneycontrol quoted Anil Kumar Bhansali, Head of Treasury and Executive Director, Finrex Treasury Advisors LLP, as saying.
Commenting on the currency movement, Jateen Trivedi, VP Research Analyst – Commodity and Currency at LKP Securities, said, “The rupee strengthened sharply to 89.60, gaining over 0.7%, supported by likely RBI intervention after testing lows near 91.00.”
2. RBI breaks speculative positions
Traders added that the intervention was likely aimed at breaking speculative positions taken by those betting on further weakness in the currency.
They said the central bank had also intervened on Wednesday to diminish these speculative positions, and Friday’s aggressive dollar selling was meant to fully unwind them. Similar interventions were carried out by the RBI in October as well, when it stepped in to prevent the rupee from weakening beyond the 88 level.
Further, RBI Governor Sanjay Malhotra, at the December MPC meeting, said that the central bank does not have any specific target levels for the currency, which helped bolster market confidence. He added that market forces would naturally guide the rupee’s positioning.
3. Optimism over US–India trade deal
On Thursday, Economic Advisory Council to the Prime Minister member Sanjeev Sanyal said there was no need to stress over the Indian currency, adding that he is “not concerned about the rupee at all.” In his address, he noted that countries like China and Japan have also witnessed exchange rate weakness during their high-growth phases.
He further added that since the 1990s, the rupee has largely been allowed to find its own level, while the Reserve Bank of India uses its reserves to intervene in either direction to curb excessive volatility.
“I am not concerned about the rupee at all. Let me say that the rupee and its current weakness should not necessarily be conflated with economic worry, because historically, if you look over time, economies in a high-growth phase often go through periods of exchange rate weakness,” news agency PTI quoted him as saying.
He added that the weakening of the rupee should not be stressed over as long as it does not generate domestic inflation. Further, India’s trade secretary said that a trade deal is likely to be finalised soon, with the country’s Chief Economic Advisor stating that a trade deal between India and the US is expected by March 2026.
4. FII inflows
As per provisional data for December 18 available on the NSE, foreign investors purchased equities worth Rs 10,990 crore, improving foreign equity inflows into the Indian markets. Apart from December 17 and December 18, foreign investors had largely remained sellers in recent sessions.
This inflow signals a revival in market sentiment, further paving the way for a recovery in the Indian currency.
Outlook for the Indian rupee
With reviving confidence over the India–US trade deal, improved foreign equity inflows, and better trade numbers reported for November, it is likely that the rupee will move towards the 89–90 level by the first half of 2026. Some currency experts have also said that, as the rupee recovers from recent lows, it could start trading closer to the 88 level during H1 FY26.
However, markets will closely watch interest rate hikes by the Bank of Japan, which has raised its short-term interest rate to 0.75% from 0.5%, marking its highest level since 1995. The rate hike could lead to an unwinding of the yen trade, which may put pressure on the rupee.