INR vs USD: RBI’s rupee support move shows results as Indian currency jumps 1% post dollar-demand curbs: Investors guide

The Indian rupee surged nearly 1% on Monday, 12 October after the Reserve Bank of India (RBI) redirected oil companies’ dollar purchases away from the spot market and introduced measures to curb corporate demand for forward dollars.

The rupee opened at 95.76 against the US dollar, compared with Friday’s close of 96.73. It emerged as one of Asia’s strongest-performing currencies, while most regional peers traded in a narrow range.

Despite Monday’s sharp rebound, the rupee remains down 6.6% so far this year.

According to a Reuters report, Citi economists said the RBI’s latest measures could trigger an initial appreciation in the rupee, followed by a period of consolidation.

“The package raises the near-term cost of rupee depreciation trades; it does not remove the underlying balance of payments pressures,” they said in a note on Monday.

On Saturday, the RBI announced a series of measures to address two major sources of pressure on the currency: sustained dollar demand from oil marketing companies amid elevated crude prices, and corporate demand for hedging against further rupee depreciation.

Expectations of continued weakness had prompted importers to ramp up forward-dollar purchases to record levels last month to shield themselves from higher future costs.

4 key things investors should know

RBI’s New Playbook: Three moves to rein in the Rupee

The Indian rupee could find near-term support from the Reserve Bank of India’s (RBI) latest measures to curb dollar demand, alongside developments in global oil markets and weakening US consumer confidence. However, currency experts caution that a sustained recovery will depend on crude oil prices, foreign capital flows and the trajectory of the US dollar.

The RBI’s measures indicate a shift towards managing dollar demand and speculative currency positioning after the recent rate hike failed to deliver the relief markets had anticipated. The rupee is expected to open around 95.80, with the first hour of trading likely to determine the near-term direction. A break below 95.50 could strengthen the recovery towards 95.00–94.80, while the RBI’s efforts to defend the 97.00 level remain central to the outlook.

RBI shifts focus from rate action to dollar demand

Direct dollar supply to oil companies

The RBI will supply dollars directly to Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) through a special window. This could reduce their dependence on the spot market and ease immediate dollar demand.

However, the arrangement could put pressure on India’s foreign exchange reserves, depending on the scale and duration of the intervention.

Higher costs for currency hedging

The central bank has mandated a 20% foreign exchange risk reserve on specified derivative contracts exceeding $2 million. The requirement could raise the cost of certain currency positions and discourage excessive demand for dollar protection.

Stricter derivative transaction limits

The RBI has also reduced the limit for derivative transactions without proof of underlying exposure from $100 million to $5 million. The move is aimed at curbing speculative positioning and limiting pressure on the rupee.

Currency market experts are likely to watch whether these measures translate into a sustained reduction in spot-market dollar demand. While the steps could provide near-term support, they cannot independently offset the impact of elevated crude oil prices or persistent foreign investor outflows.

Trump-Putin oil deal: Can Russian diesel cool prices?

US President Donald Trump’s efforts to secure cheaper Russian oil and fuel supplies could offer another potential trigger for the rupee. The proposed arrangement involves millions of tonnes of Russian diesel entering US and global markets, with more than 300,000 tonnes expected initially. The US Treasury has issued a temporary licence to facilitate the supplies despite existing sanctions on Russia.

However, the extent of the relief remains uncertain. Russia is facing domestic fuel shortages following Ukrainian attacks on refineries and has restricted diesel exports. These constraints could limit the volume of fuel available for overseas markets.

Energy market experts will therefore focus on actual deliveries rather than announcements. A sustained increase in fuel supplies could ease global price pressures, but any shortfall in Russian deliveries could limit the impact on crude and refined fuel markets.

The experience of 2018 offers a useful precedent. Following Trump’s withdrawal from the Iran nuclear deal, Brent crude climbed to $86.74 per barrel amid supply concerns. Subsequent sanctions waivers, rising global production and concerns about economic growth helped reverse the rally, with prices falling to around $50 by December.

The episode illustrates how changes in expected supply can reshape oil price expectations. For India, a sustained decline in crude prices could lower the import bill, reduce dollar demand from oil companies and support the rupee. However, the currency benefit will depend on the scale and persistence of any decline.

US consumer confidence weakens: Will the dollar lose support?

The US dollar could also face pressure if weakening consumer sentiment is accompanied by softer inflation and a less restrictive Federal Reserve outlook.

The University of Michigan’s consumer sentiment index fell to 46.3 in early October from 48.1, while the current economic conditions index dropped to a record low of 44.7. Rising energy costs, persistent inflation and high borrowing costs continue to weigh on US households.

However, currency strategists caution that weak consumer confidence alone may not be sufficient to trigger a sustained dollar decline. Markets will also assess inflation data, labour market conditions and the Federal Reserve’s policy outlook.

If inflation moderates and expectations of tighter US monetary policy recede, the dollar could weaken, potentially offering some relief to emerging-market currencies, including the rupee. Conversely, persistent inflation and elevated US yields could keep the dollar supported.

Rupee Outlook

Amit Pabari, Managing Director of CR Forex Advisors, said the rupee is likely to strengthen in the near term, with the ₹96.70– ₹97.00 zone acting as a strong resistance. He expects the domestic currency to move towards ₹95.80– ₹95.50.

Anindya Banerjee, Head of Currency and Commodity Research at Kotak Neo, said the USD/INR pair is likely to trade within the ₹94– ₹97 range. He expects the RBI to remain particularly vigilant if the pair moves towards ₹96.50, with its latest measures likely to help contain pressure in the ₹96.00– ₹96.50 zone. He clarified that this is an assessment of the central bank’s likely response rather than an officially declared exchange-rate ceiling.

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