The Indian Rupee (INR) opened slightly lower against the US Dollar (USD) at the start of the last week of 2025. The USD/INR pair rose to nearly 90.35 amid strong demand for the US dollar by Indian importers in both onshore and offshore markets, following the mid-December sell-off due to the Reserve Bank of India (RBI) intervention.
The Reserve Bank of India sold the US dollar heavily in both spot and non-deliverable futures (NDF) markets to protect the Indian rupee after it fell to record lows around 91.55. While investors took advantage of the decline in the USD/INR pair as an opportunity to add the US dollar at deal levels.
There has been pent-up demand for the US dollar among Indian importers amid the absence of an announcement of a trade deal between the US and India. So far this year, the Indian currency has depreciated more than 6% against the US dollar, the worst performer among its Asian counterparts, although the US Dollar Index (DXY), which measures the value of the US currency against six major currencies, fell by almost 9.5%.
Foreign institutional investors have also offloaded significant stake in the Indian stock market this year, while expensive valuations of Indian stocks vis-à-vis Chinese and Taiwanese markets has been another major factor behind the ongoing sell-off. From December 01 to December 26, FIIs sold shares worth Rs. 24,148.33 crores.
This week, investors will focus on the November federal fiscal deficit data, which will be published on Wednesday.
Daily Summary Market Drivers: The US dollar is trading weakly amid aggressive Fed bets
- The Indian Rupee is falling against the US Dollar, even with the DXY trading weakly near 98.00 as of writing. The DXY is broadly under pressure, trading near a 12-week low of 97.75, amid expectations that the Federal Reserve (Fed) will cut interest rates by at least 50 basis points in 2026.
- The odds that the Fed will cut interest rates by at least 50 basis points in 2026 is 73.3%, according to the CME FedWatch tool. The expected size of the Fed’s interest rate cuts is larger than what the Fed’s dotted chart of monetary policy announced this month showed.
- The Fed’s bullet chart showed that policymakers collectively see the federal funds rate heading to 3.4% by the end of 2026, suggesting there will be no more than one rate cut.
- The Fed’s dovish forecasts are contributing to weak labor market conditions and the latest evidence that the tariffs have had a one-time impact on inflationary pressures. The latest Consumer Price Index (CPI) data showed that headline inflation slowed to 2.7% year-on-year in November.
- For further signals on the outlook for monetary policy, investors will focus on the Federal Open Market Committee (FOMC) minutes for its December meeting, which will be published on Wednesday.
- In 2026, the main driver for the US dollar will be the selection of a new Federal Reserve Chairman, an event that will reinforce dovish expectations, given US President Donald Trump’s support for lowering interest rates despite rising domestic markets. “I want the new Fed chairman to cut interest rates if the market is doing well,” Trump said last week.
Technical Analysis: USD/INR is holding above the 20-day EMA
On the daily chart, the USD/INR is trading at 90.3515. The pair is holding above the bullish 20-day exponential moving average (EMA) at 90.1934, keeping the short-term bullish bias intact. The slope of the average remains positive, reflecting continued upward pressure.
The 14-day Relative Strength Index (RSI) at 55 (neutral) confirms steady momentum without overbought pressures.
The focus remains on whether the price can maintain momentum above the 20-day EMA at 90.1934, where pullbacks can be accommodated. A close below this dynamic support would weaken momentum and open room for a deeper correction towards the December low around 89.50. While sustained strength above the 20-day EMA would extend the trend towards the all-time high at 91.50.
(The technical analysis for this story was written with the help of an artificial intelligence tool.)
Frequently asked questions about the Indian Rupee
The Indian Rupee (INR) is one of the currencies most sensitive to external factors. The price of crude oil (the country relies heavily on imported oil), the value of the US dollar – most trade is done in US dollars – and the level of foreign investment are all influencing factors. Direct intervention by the Reserve Bank of India (RBI) in the foreign exchange markets to maintain exchange rate stability, as well as the level of interest rates set by the RBI, are the major factors influencing the rupee.
The Reserve Bank of India (RBI) actively intervenes in the Forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the Reserve Bank of India is trying to keep inflation at its target of 4% 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 low interest rates in order to place their money in countries offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that affect the value of the rupee include inflation, interest rates, economic growth rate, trade balance, and inflows of foreign investment. A higher growth rate can lead to more foreign investments, leading to increased demand for the rupee. A less negative trade balance will eventually lead to a stronger rupee. Higher interest rates, especially real rates (interest rates below inflation) are also positive for the rupee. The risk environment could lead to greater inflows of FDI and indirect FDI (FDI and FII), which also benefits the rupee.
A higher rate of inflation, especially if it is relatively higher than its counterparts in India, is generally negative for the currency because it reflects a decline in the value of the currency through increased supply. Inflation also increases the cost of exports, causing more rupees to be sold to buy foreign imports, which represents a negative value for the rupee. Meanwhile, 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 holds for lower inflation.
