RBI Measures Support Rupee, But Gradual Depreciation Expected
The Reserve Bank of India's (RBI) measures to support the Indian Rupee have led to a significant build-up of foreign exchange reserves and liquidity, reducing the risks of sharp depreciation against the US Dollar. As of August 31st, the amount of Dollars attracted through various facilities stands at $136 billion, with the RBI likely closing the FCNR(B) facility earlier than expected.
While these measures have provided the RBI with more firepower to defend against INR weakness, they also bring challenges related to INR liquidity management. Michael Wan from MUFG notes that without active intervention by the RBI in the spot FX market, there has been no significant movement in USD/INR rates.
Despite this, MUFG still expects USD/INR to rise gradually into 2027, with the INR underperforming other Asian currencies. The bank forecasts a target of 95.50 by December 2026 and 96.50 by June 2027, indicating a gradual depreciation in INR against the Dollar.
Wan emphasizes that while RBI's measures have reduced tail risks of sharp INR depreciation, underlying Dollar demand remains strong, including from gross FDI repatriation and a robust IPO issuance pipeline.