USD/INR corrects sharply from life-time highs as RBI limits bank’s foreign exposure
- The Indian Rupee rebounds strongly against the USD, following the RBI’s cap on net open rupee positions in the forex market.
- Oil prices rally amid fears of further escalation in the Middle East war.
- FIIs continue to dump their stake in the Indian stock market.
The Indian Rupee (INR) bounces back against the US Dollar (USD) in the opening trade at the start of the week, following the Reserve Bank of India’s (RBI) introduction of new limits on banks’ foreign-exchange exposure, which pushes the USD/INR pair lower by over 1% to near 94.00. On Friday, the pair posted a fresh all-time high at 95.45.
Late Friday, the RBI directed banks to cap their net open rupee positions in the foreign exchange market at $100 million by the end of each business day, with compliance required by April 10, Reuters reported.
The impact of the RBI’s curb on long onshore positions in the USD/INR pair is expected to be short-lived, as the fundamental damage to the Indian currency due to higher oil prices and the consistent outflow of foreign funds could trigger the resumption of the broader decline.
Fears of US ground invasion of Iran boost oil prices
Global oil prices have rallied in the early trade on Monday, with the WTI Oil Price rising over 2.5% to near $102.50, amid fears that the United States (US) could execute military action on the ground in Iran.
On Thursday, a report from the Wall Street Journal (WSJ) showed that the US Pentagon is considering sending 10,000 additional military troops to Iran for ground military attacks. In response, Iran’s Parliament speaker Mohammad Bagher Ghalibaf also said that Iran would "rain fire" on any US troops attempting to enter Iranian territory, BBC reported.
Currencies from economies, such as India, that rely heavily on oil imports to meet their energy needs tend to underperform in a high oil price environment.
Foreign outflows balloon amid Middle East tensions
Foreign Institutional Investors (FIIs) are consistently dumping their stake in the Indian stock market as the ongoing war in the Middle East has prompted demand for safe-haven assets, such as the US Dollar (USD).
So far this month, Foreign Institutional Investors (FIIs) have remained net sellers on all trading days and have offloaded their stake worth Rs. 1,11,376.83 crore.
Investors await key US economic releases
This week, investors brace for high volatility in the US Dollar as a string of US labor market-linked and ISM Purchasing Managers’ Index (PMI) data are scheduled to be published.
Investors will pay close attention to the US Nonfarm Payrolls (NFP) data for March, which will influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook.
Technical Analysis: USD/INR retraces from all-time high of 95.45
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USD/INR trades lower near 94.00 as of writing. However, the near-term bias is bullish as price holds well above the rising 20-day Exponential Moving Average (EMA) at 93.23, keeping the recent uptrend intact despite last week's pullback from last week’s peak. The sequence of higher closes since early November reinforces upward pressure, even after the rejection above 95.35.
The 14-day Relative Strength Index (RSI) has retreated from overbought extremes toward 66, indicating strong but cooling bullish momentum rather than a completed top.
Immediate support emerges at the 20-day EMA around 93.23, where a break would expose deeper downside toward the January high of 92.50. Below that, the next notable support stands at 92.00, where the prior consolidation base aligns with the broader trend structure. On the upside, initial resistance is seen at the recent high around 95.45, with a daily close above this barrier opening the way toward the 96.00 area as the next upside reference. As long as price holds above 93.23, pullbacks remain consistent with a bullish continuation scenario.
(The technical analysis of this story was written with the help of an AI tool.)
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.
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