Rupee Strengthens as RBI Defends 87.40-87.50 Territory

The Indian rupee has shown resilience in recent days, strengthening following the Reserve Bank of India's (RBI) firm defense of the 87.40-87.50 territory. The currency appreciated by around 20 paise on Thursday, trading at 87.25 against the US dollar, as the RBI stepped in to manage volatility. This move comes amidst global market uncertainty and persistent foreign capital outflows.



The RBI's intervention strategy has been a key factor in the rupee's performance. The central bank has been managing the currency's value within a range against the US dollar, a policy known as a managed floating exchange rate or dirty float. This approach allows the rupee to depreciate more freely while providing a safety net to prevent excessive volatility.

The RBI's tolerance for rupee depreciation has had implications for India's current account deficit (CAD) and foreign exchange reserves. A depreciating rupee makes Indian exports cheaper in the international market, potentially boosting export volumes and earnings. This could help narrow the CAD, which has been a concern for India. However, a weaker rupee also increases the cost of imports, which could exacerbate inflation, particularly for oil products.

Moreover, a depreciating rupee could lead to a decline in foreign exchange reserves, as the RBI may need to intervene to manage the currency's value. This is evident in the data, where India’s foreign exchange reserves declined by $79 billion since September 2024 to $625.87 billion by January 10, 2025. However, a depreciating rupee could also attract foreign capital inflows, as investors may see opportunities in the Indian market.

Global market dynamics, particularly US dollar strength and Trump's policy actions, have significantly impacted the Indian rupee's future performance. The Indian rupee's trajectory depends on whether the US dollar strengthens further or stabilizes. Analysts expect the rupee to depreciate further to around 87 per dollar by March 2025, depending on global market dynamics and Trump's policy actions.

In conclusion, the Indian rupee has shown resilience in recent days, strengthening following the RBI's firm defense of the 87.40-87.50 territory. The RBI's intervention strategy has been a key factor in the rupee's performance, with implications for India's CAD and foreign exchange reserves. Global market dynamics, particularly US dollar strength and Trump's policy actions, have significantly impacted the Indian rupee's future performance. As the market continues to evolve, investors should stay informed and consider expert advice when navigating these uncertain conditions.