The Indian rupee surged to 86.65, aided by dollar sales, yuan strength, and easing REER, despite trade war concerns under Trump's presidency
Mumbai: The Indian rupee saw a relief rally, settling at a one-week high on Thursday, tracking the Chinese yuan and dollar sales from foreign banks. Traders noted an inflow of approximately $1 billion from a block deal related to HDFC Bank, which supported the rupee’s appreciation.
Adding to the positive sentiment was data showing that the rupee’s 40-currency Real Effective Exchange Rate (REER) eased to 104.83 in January 2025, down from a high of 108.30 in November and 107.20 in December 2024. This decline signals a reduction in the currency’s overvaluation.
Analysts also believe that the reciprocal tariffs set to be imposed by President Trump are unlikely to significantly impact India’s exports, except for trade in petrochemicals and pharmaceuticals, which together constitute only one-fifth of total exports. Furthermore, the implementation of these tariffs is expected to be a gradual, multi-step process.
Anil Bhansali, Head of Treasury at Finrex Treasury Advisors, stated, “Foreign banks were sellers for custodian banks, possibly for foreign portfolio investors (FPIs) buying equity and debt. A few exporters, who were unable to sell at higher levels, also sold dollars, bringing the dollar-rupee down to 86.58, while it closed at 86.66 from Tuesday’s closing of 86.95.”
“The rupee is expected to trade within a range of 86-88 over the next two months, with the RBI actively defending this level. The RBI holds short positions of approximately $68 billion in forwards, which will keep it bidding for dollars at lower levels. Therefore, a significant appreciation of the rupee beyond 86 is unlikely, but the 86 level is expected to hold in the coming days. Unsold exporters are waiting for higher levels to sell,” Bhansali added.
At the interbank foreign exchange, the rupee opened at 86.88, touching an intraday high of 86.58 and a low of 86.88 against the greenback. It ended the session at 86.65 against the dollar, logging a gain of 33 paise from the previous close. The rupee outperformed regional peers, which also saw gains amid a strengthening Chinese yuan and Japanese yen. Meanwhile, the US dollar index, which measures the greenback’s strength against a basket of six currencies, was trading 0.21% lower at 106.95.
The RBI sold $69 billion in forex while purchasing $53.9 billion in the spot market in December. As a result, its net short position in the forward market rose to $67.9 billion by the end of December, up from $58.9 billion in November.
The rupee faced pressure following US President Donald Trump’s return to office and renewed trade war concerns. Since November 6, 2024, the rupee has depreciated by 3.2% against the dollar. A weaker rupee increases import costs, driving up prices for essential goods such as crude oil.
To stabilize the rupee, the RBI’s dollar sales brought India’s foreign exchange reserves down to $631 billion at the end of January, compared to a record high of $704.88 billion in the first week of September in FY25.
REER is the weighted average of a country’s currency relative to a basket of major currencies. An increase in REER indicates that exports are becoming more expensive while imports become cheaper, reducing trade competitiveness.
