The rupee's biggest rally in seven years will give the central bank scope to rebuild its foreign-exchange reserves, potentially limiting further gains after the boost from the India-US trade deal, according to some analysts.
Barclays Bank Plc and Nomura Holdings Inc. are among those predicting that the Reserve Bank of India will use the recovery in the rupee to buy dollars. They recommend shorting the rupee — Nomura sees it at 94 to a dollar by May, while Barclays is targeting that level via a three-month offshore position.
The rupee was down 0.1% to 90.40 against the dollar on Wednesday, following a 1.4% advance on Tuesday when US tariff cut helped it rebound from Asia's worst performer last month to be the region's top gainer. While the RBI has used dollar inflows to bolster its reserve pile in the past, Governor Sanjay Malhotra is less predictable on his strategy than his predecessor, making the currency's recovery harder to gauge.
It may not be a “completely smooth sailing for the rupee,” said Joey Chew, head of Asia FX research at HSBC Holdings Plc. The RBI's FX policy could complicate things as it “has been intervening in a rather unpredictable way over the past few months to prevent one-sided speculative positioning” in the rupee.
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The central bank has a large negative short forwards book of $62.4 billion as of December, which means it will need to repay these dollars. The rupee underperformed in the second quarter of 2025 because the RBI unwound about $25 billion of the book, according to Chew.
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The central bank sold dollars heavily in 2025 — net $49.5 billion as per Nomura estimates — to support the rupee. Still, forex reserves have surged to a record $709 billion, helped by a weaker greenback, surge in gold prices and RBI's forex swaps.
“A key factor to watch out for would be the levels at which the RBI could buy dollars and rebuild its reserves,” said Dhiraj Nim, forex strategist at Australia and New Zealand Banking Group in Mumbai.
The RBI may eventually rebuild reserves but it seems unlikely at the current levels, according to Standard Chartered Plc. HSBC expects the central bank will allow the rupee to recover in the March quarter before rebuilding reserves.
The central bank has intervened in the market in recent months to buy rupee as the currency tested a series of lows. RBI officials have repeatedly said that the exchange rate is market-determined and the central bank's job is to ensure orderly movements and curb excess volatility.
A 3% annual depreciation in the rupee is par for the course, given India's inflation differential with peers, Governor Malhotra told a television channel last month.
Barclays is advising clients to tactically short the rupee as it doesn't expect the current rally to sustain and equity outflows to completely reverse. MUFG Bank Ltd. is advising clients to build up long dollar/rupee positions in the medium term.
Still, a deal will provide a near-term reprieve to the rupee and support the bond market as traders bet on foreign funds returning to local assets. Analysts at Societe Generale see the currency strengthening to 87-88 in the coming weeks, while those from HSBC forecast a move to 88 by the end of March.
The main impact to bonds comes via the FX market and RBI's intervention strategy, Nomura strategist Nathan Sribalasundaram wrote in a note. “Short-term inflows provide the RBI with an opportunity to accumulate back reserves and inject rupee liquidity.”
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