Indian Rupee Outlook: RBI Support Faces Persistent Flow Pressures
Barclays sees scope for renewed Indian Rupee gains, but warns that one-off inflows and RBI support have not removed the pressures behind its weakness.
The Indian Rupee gave back more of its recent gains on Monday, taking the US-Dollar-to-Indian-Rupee exchange rate to 95.1756, up 0.24% on the day.
That left USD/INR above its 94.3128 close last Wednesday, when the Rupee’s recovery had taken it much closer to the 94 area Barclays considers possible in the near term.
The bank’s warning is that another Rupee advance would not necessarily mark a lasting improvement in India’s external position.
Barclays says: “While there may be some further short term INR upside, potentially to around USDINR 94.0, we continue to expect gains to prove temporary.”
The 94 level is a near-term possibility, without a fixed date, rather than a year-end target.
Flotation inflows have not ended broader foreign selling
Barclays attributes the earlier recovery principally to Reserve Bank of India measures: “The INR continued to rally following the RBI’s measures to curb near-term dollar demand.”
“The INR was also helped to a lesser extent by foreign equity inflows tied to the Jio Platforms IPO.”
But money arriving for a particular share offering need not signal renewed overseas demand for Indian assets more broadly.
The bank says: “The IPO flows were a one-off and foreign portfolio flows in both equities and bonds are still negative MTD. We see little prospects of a reversal anytime soon.”
“We also think the RBI’s recent steps do not fix underlying structural imbalances, leaving the currency vulnerable to renewed depreciation pressures.”
Importer demand and flotation-related foreign outflows weighed on the Rupee on Monday, according to reporting by the Financial Express.
That near-term caution differs from Crédit Agricole’s longer-term Rupee recovery forecast, which looks into 2027.
RBI support can limit losses without reversing the trend
Barclays expects the central bank to resist another sharp fall in the Rupee, even though doing so draws on its foreign-exchange resources.
“That said, we expect the RBI to continue to intervene to support INR on any move back to 97.00 despite the ongoing reserves drawdown.”
The 97 reference describes where the bank expects intervention, not an announced RBI exchange-rate commitment or a formal Barclays forecast.
The currency’s interest-rate support also depends on how much tightening investors have already anticipated.
Barclays writes: “While we see two more rate hikes from the RBI, markets are pricing in more in the belief that the Bank may need to turn to rates support to defend the rupee.”
Its US outlook provides a further obstacle to a sustained Rupee recovery: “Accordingly, we still expect the Fed to hike twice more in the next three meetings, even as it is all but certain to stand pat on Wednesday.”
Indian rate rises would therefore compete with higher US returns, which could limit their appeal as a reason to buy Rupees.
What This Means for USD/INR
Monday’s move above 95 shows that part of the Rupee’s recovery has already unwound. Barclays still allows for a return towards 94, but expects such gains to prove temporary.
The more durable test is whether foreign buying broadens beyond the flotation-related inflow and persists in both equities and bonds. Barclays’ assessment gives little reason to assume that has happened, despite the RBI’s ability to influence near-term Dollar demand.
Barclays also expects fewer RBI hikes than markets anticipated in its assessment. If investors scale back those expectations, the Rupee could lose some rate support even while the central bank continues tightening or intervening against currency weakness.
