The Indian rupee staged a powerful comeback on Wednesday, recording its most significant single-day gain in seven months. This dramatic reversal was fueled by aggressive intervention from the Reserve Bank of India (RBI), which stepped into the currency market to sell US dollars and stem the rupee's recent decline.
RBI Steps In to Halt the Slide
According to sources familiar with the transactions, the central bank actively sold dollars in the local foreign exchange market. This decisive action followed a series of record lows for the rupee in recent weeks, which had raised questions about the RBI's strategy. The currency soared by as much as 1% to 90.0963 against the US dollar, marking its strongest performance since May 23. This surge came right after the rupee had closed at an all-time low in the previous trading session.
Market experts believe the intervention was triggered after the RBI conducted a $5 billion foreign-exchange swap on Tuesday. VRC Reddy, Head of Treasury at Karur Vysya Bank Ltd., noted that the central bank sold dollars around the 91 level. "There was a sense that the market was taking the rupee's rapid depreciation lightly, and today the RBI has come back aggressively to dispel that view," Reddy stated.
Unwinding Speculative Pressure and Underlying Weakness
The RBI's forceful move is expected to curb speculative trading against the rupee for the time being. Anil Kumar Bhansali, Head of Treasury at Finrex Treasury Advisors, said the action would lead to an unwinding of speculative positions. However, the fundamental pressures on the currency remain.
Before Wednesday's sharp recovery, the rupee had depreciated by almost 2% in December alone. This weakness was driven by sustained foreign fund outflows from Indian equities and bonds, partly due to delays in finalizing a trade deal with Washington. Sentiment has been further dented by the threat of 50% US tariffs on certain Indian exports, which could reduce dollar inflows. At the same time, robust import demand continues to keep pressure on the rupee.
Outlook Hinges on Trade Deal and Flows
Karur Vysya's Reddy expressed caution about the rupee's future trajectory, suggesting it may not strengthen much beyond the 90 mark until the pending trade accord with the United States is concluded. The scale of foreign selling has been substantial, with global funds pulling out approximately $18 billion from local equities this year. These withdrawals have significantly exacerbated the strain on India's currency.
Wednesday's intervention underscores the RBI's readiness to defend the rupee against excessive volatility. While the move provides immediate relief, the medium-term path for the currency will likely depend on a resolution of the trade negotiations and a reversal in the trend of foreign capital flows.
