Whalesbook
The Reserve Bank of India's recent dollar purchases mark a tactical defense against a weakening rupee. This trend has been amplified by external shocks hitting global energy markets. The central bank's active intervention in the foreign exchange market aims to protect the rupee from sharp drops, but underlying pressures point to continued volatility.
Defensive Dollar Buys in January
In January, the Reserve Bank of India shifted from being a net seller to a net buyer of dollars in the foreign exchange market, acquiring $2.52 billion. This was the first such intervention in eight months, contrasting sharply with the $10.02 billion it sold in December. The RBI bought nearly $28 billion and sold $25.47 billion during January to curb exchange rate volatility. This action coincided with the rupee’s struggle, which reached a record low of 91.9875 against the U.S. dollar on January 30, 2026. The currency was pressured by concerns over a trade stalemate with the U.S. and persistent foreign outflows. The rupee had depreciated by 2.3% in January alone.
Analyst Forecasts Point to Rupee Weakness
The RBI's January intervention followed consistent dollar sales throughout much of 2025, with net sales reaching $10.02 billion in December and $9.71 billion in November. This shift to net buying highlights the intensified pressure on the rupee. Adding to existing trade and capital flow worries, the escalating Middle East conflict has driven oil prices up by over 50% this month. As a major oil importer, India is particularly exposed to this surge, which directly impacts its trade balance and inflation outlook. BofA Global Research now forecasts the rupee to reach 94 against the dollar by June 2026, a significant downward revision from its prior estimate of 89, assuming the current crisis eases within weeks. Other analysts express caution; MUFG forecasts USD/INR to rise towards 92.00 by the third quarter of 2026, citing persistent capital outflows and trade deal delays. Societe Generale also sees tactical risks skewed toward further INR weakness, warning that a retest of 92.00 cannot be ruled out, especially if crude prices remain elevated. The central bank's net outstanding forward dollar sales stood at $67.37 billion at the end of December, indicating its continued role in managing exchange rate stability. These forward sales also rose to a nine-month high of $67.77 billion by the end of January.
Challenges Ahead for the Rupee
The RBI's intervention, while aimed at smoothing volatility, may prove insufficient against the mix of geopolitical and economic pressures. The sustained surge in oil prices is a key risk, potentially widening India's current account deficit to 1.3%-2.5% of GDP if crude stays in the $100-$110 per barrel range. This, along with persistent foreign portfolio outflows exceeding $9.5 billion in March alone, increases pressure on the rupee. Moody's Analytics warns that a prolonged Middle East conflict could reduce India's GDP output by nearly 4% from its baseline trajectory. The RBI's forward dollar sales have also climbed, reflecting increased defense of the rupee. However, this aggressive stance may not fully insulate the currency from ongoing global instability. The market is watching whether the central bank's efforts can stop the wider depreciation trend, which analysts predict will continue, with some expecting the rupee to trade around 94 by mid-2026.
Future Outlook
Analysts' forecasts for the Indian rupee remain mixed but lean towards caution in the near term. Further rupee weakness is possible if geopolitical tensions and oil prices stay high. While the RBI has shown a willingness to intervene, its ability to counter sustained external shocks without significantly depleting reserves or fueling inflation remains a key concern. The effectiveness of its strategy will be tested in the coming months as global economic and geopolitical conditions continue to evolve.