In the past month, the Reserve Bank of India (RBI) has aggressively stepped in to defend the rupee. This is quite unlike the situation when it was allowing the rupee to slip for several reasons, including helping exporters after the US government’s punitive tariffs kicked in.
Market experts believe that mid-October was the turning point, when speculators were pushing the rupee towards Rs 89/$ that the central bank decided to move in.
As a result, the rupee has been moving at a narrow range of 11 paise (daily average) in November compared to the daily average movement of 35 paise in April and 49 paise in May.
“Among major Asian currencies, the rupee has underperformed most peers, depreciating about 4%. This is despite a softer dollar and a narrowing inflation differential, which ordinarily should have provided some support,” said V R C Reddy, head of treasury, Karur Vysya Bank.
He added that considering India’s robust growth fundamentals, the rupee’s weakness appears somewhat disproportionate. “This likely explains why the RBI has been actively defending the 88.80 zone,” he said. On Friday, it closed 88.74.
The rupee has fallen 3.84% so far in the financial year – the highest in the past three years. It is also the worst performer in FY26 compared to its Asian peers, followed by Phillipine pesso and Japanese yen, according to Bloomberg data.
As per RBI data, the real effective interest rate (REER) was 97.65 in September compared to 98.80 in August, indicating that the currency is undervalued. REER compares a country’s currency against a basket of 40 foreign currencies, adjusted for inflation.
The rupee has been under consistent pressure due to high US tariffs, outflows from foreign institutional investors, and demand for gold imports.
According to Anil Kumar Bhansali, head of treasury – Finrex Treasury Advisors LLP, RBI likely sold $15-20 billion in both spot and forward markets. He added that they have continuously intervened in the market with a daily sales of around $ 300 million.
Market participants said that the central bank is expected to remain supportive of the currency going forward, as it may not be comfortable with heightened volatility in the absence of sustainable foreign inflows.
The RBI in its October policy stated that it is keeping a close watch on movements of the rupee and will take appropriate steps, as warranted. “With the intervention, the RBI has sent a clear signal that it would not tolerate speculative positions in the market,” said a senior forex trader at a state-owned bank. The RBI was active with its interventions since October-mid, when speculations were built.
The central bank’s dollar short forward positions rose by $6 billion to $59.4 billion in September, marking the first increase in seven months, latest RBI data showed. Currency analysts expect forward position to increase further in October as intervention was more during the month.
In the near-term, market participants expect rupee to trade in the range 88.50-89. If a trade deal happens, rupee will likely appreciate to 87 level, they said.