Rupee Rally Gains Momentum: Why Analysts Are Revising Views to Bullish

The Indian rupee’s recent surge has upended conventional wisdom, with analysts pivoting from a decade-long bearish stance to cautious optimism. After depreciating steadily since 2014, the currency has rallied nearly 3% against the dollar in early 2025, reaching a six-month high of ₹84.78. This shift isn’t just technical—it reflects a confluence of macroeconomic tailwinds, geopolitical optimism, and market psychology. But is this a sustainable reversal, or a fleeting countertrend?

The Rally in Context: A Surge Driven by Multiple Forces

The rupee’s ascent defies the odds. In 2024, it fell to a record low of ₹88.50 as global dollar strength and India’s widening trade deficit weighed on sentiment. Fast-forward to 2025, and the currency has rebounded sharply. Analysts now project a year-end rate of ₹85.50, a stark contrast to earlier forecasts of ₹88-90.

This turnaround is underpinned by three pillars: portfolio inflows, trade dynamics, and technical momentum. Let’s dissect each:

1. Portfolio Inflows: Capital Floods Back

Foreign institutional investors (FIIs) have injected over $2 billion into Indian equities and bonds since January 2025, reversing a net outflow trend that spanned most of 2024. The inflows stem from two factors:
- Valuations: Indian equities trade at a 25% discount to global peers, making them attractive to global funds.
- Risk Appetite: Improving global liquidity, driven by Fed easing expectations, has reignited emerging-market interest.

2. Trade Optimism: Exports Hit Record Highs

India’s merchandise trade deficit narrowed to $12.4 billion in March 2025, down from $18.5 billion in February. This improvement is partly due to:
- IT Services and Pharma Exports: These sectors, which account for 40% of India’s services exports, surged to record levels, benefiting from rising global demand and currency arbitrage.
- Crude Oil Prices: While oil remains India’s largest import, prices have stabilized below $85/barrel, reducing pressure on the trade balance.

3. Technical Momentum: A Breakout with Bulls in Charge

The USD/INR pair’s breach of the ₹84.70–84.75 resistance zone in late April triggered a technical rally. Traders note:
- The Relative Strength Index (RSI) at 32.00 suggests undervaluation, but momentum needs further catalysts to sustain.
- The 50-day SMA at ₹84.60 has now crossed above the 200-day SMA at ₹85.58**, signaling a potential bullish reversal.

Geopolitical and Policy Catalysts: Beyond the Charts

• U.S.-India Trade Talks: Positive signals from ongoing tariff negotiations with the U.S. have boosted investor confidence, potentially unlocking a $200 billion bilateral trade deal.
• Fed’s Dovish Pivot: With markets pricing in rate cuts by June 2025, emerging-market currencies like the rupee gain support as dollar demand wanes.

The Elephant in the Room: Structural Risks Linger

Despite the optimism, analysts warn of long-term headwinds:
- Oil Prices: A sustained rise above $85/barrel could push the trade deficit back toward $20 billion monthly.
- RBI’s Monetary Policy Lag: The central bank’s reluctance to hike rates—while global peers tighten—has eroded the rupee’s interest rate advantage.

Where to From Here? A Short-Term Play, Not a Buy-and-Hold

• Traders: Take profits near ₹85.50, with stop-losses above ₹84.95 to mitigate retracement risks.
• Investors: Hedge exposure via USD/INR futures; avoid long-term bullish bets until structural risks abate.

Conclusion: A Rally, Not a Revolution

The rupee’s 2025 rebound is a tactical win, not a fundamental turnaround. While FII inflows and Fed easing provide near-term support, the currency remains vulnerable to oil prices, geopolitical shifts, and RBI inaction.

Consider the data:
- Reuters forecasts project the rupee to weaken to ₹88.59 by 2030, underscoring long-term risks.
- Trade deficit trends must stay below $15 billion monthly to sustain the rally—a fragile threshold given global oil dynamics.

In short, the rupee’s rise is a fleeting opportunity for nimble traders, but a cautionary tale for long-term investors. The bulls are riding a wave—but the tide could turn faster than expected.