Rupee Starts Firmer on RBI Backing Amid Trade Headwinds

The Indian Rupee opened on Friday morning at ₹89.87 against the U.S. Dollar, up from Thursday's closing price of around ₹90.10. As a result of intervention by the Reserve Bank of India (RBI), the Indian Rupee gained ground against the U.S. Dollar. However, while weak Asian Currency trends and continued portfolio outflows are negative for the Indian Rupee, early trading was buoyed by RBI Dollar sales and offsets for depreciation.

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Pattern of Intervention Continues

As with other sessions, RBI's Dollar sales at State Bank of India had supported strength in the Indian Rupee. Once again, following heavy importer hedging and FII selling in the past day, the performance of the Indian Rupee has dropped. On Thursday, the Indian Rupee dropped back down to ₹89.75, which was initially up on heavy selling pressure due to the upcoming increase in tariffs by U.S. President Donald Trump. As such, RBI continues to disrupt one-way positioning for Dollars while maintaining its two-way market.

Regional and Global Aspects

Most Asian currencies have shown weakness leading up to the key U.S. jobs data release, and, according to economists surveyed by Reuters, they expect modest job creation and no change in the current unemployment rate of 4.5%. As such, markets are weighing the impact of the potential increased unemployment rate versus the market expectations of the number of jobs created, leading to a greater expectation of a cut in Interest Rates by the U.S. Federal Reserve for the January meeting onwards. Therefore, with the Dollar Rupee pair softening to the ₹89.90 levels post-market, the Rupee was able to open higher once again.

Structural Pressures Linger

The uncertainty surrounding trade deals, as well as the practice of aggressively hedging on behalf of importers during downturns, has contributed to continued foreign portfolio outflow. Given that there is no expected return of sustained capital inflows back to India, the Reserve Bank of India (RBI) will continue to see limited gains. However, domestic institutional buying helps to support the stability of equities. Added to this are geopolitical events that add further uncertainty to the overall outlook.

RBI's Balancing Act

India's foreign reserves can finance 11 months of import bills and provide approximately 30 paise of foreign currency exchange interventions each day without a decline in the value of those reserves. The rupee's forecasted 5% decline in value from FY25 to FY26 reflects a 2-3% difference in the inflation rate between the U.S. Dollar and the Rupee. 
The increasing softness of U.S. job figures provides support for carry trades for exporters and domestic banks. Domestic capital inflows, as evidenced by mutual fund inflows during this fiscal year, have insulated the rupee against decline. However, Trade Policy Clarity will ultimately return $10-15 billion of FPI in the coming months.