Rupee Rises on Weaker Dollar as Policy Uncertainty Weighs on Greenback

The Indian rupee appreciated sharply against the US dollar on Tuesday, buoyed by a broad-based decline in the greenback amid renewed concerns over US monetary policy direction. Mirroring the movement of several other Asian currencies, the rupee ended the day at ₹82.91 per USD, gaining nearly 20 paise from the previous close of ₹83.11.

The rally was part of a larger trend in the Asian forex market, where most regional currencies recorded gains, supported by a retreat in US Treasury yields and a correction in the dollar index, which slipped below 105 after touching recent highs.

Dollar Retreats as Markets Reassess Fed Outlook

The decline in the US dollar comes as global investors reassess expectations surrounding the Federal Reserve’s policy path. Mixed US economic data—particularly signs of cooling in consumer spending and wage growth—have raised doubts about the need for prolonged high interest rates.

“Traders are recalibrating their expectations of how aggressive the Fed will be in the second half of 2025,” said Anindya Banerjee, Vice President (Currency Derivatives & Interest Rate Derivatives), Kotak Securities. “That’s leading to profit-taking on the dollar long positions and favoring risk-sensitive currencies like the rupee.”

Market participants have priced in a 60% chance of a rate cut by November, according to CME FedWatch Tool data, as economic resilience shows signs of fading. The softer stance from the Fed could spell further pressure on the dollar, which had rallied for most of the first half of the year.

Asian Currencies Strengthen in Tandem

The Indian rupee’s gain is not in isolation. The South Korean won, Thai baht, and Malaysian ringgit also advanced between 0.2% and 0.4%, reflecting broad regional optimism. These moves were also helped by continued foreign inflows into emerging markets, especially in the equities space.

"The rupee is tracking Asian peers and the weakness in the dollar index," said Vivek Goenka, Head of FX Trading at Axis Bank. "There’s also a technical reversal underway after the rupee remained under pressure for several weeks due to oil import bills and equity outflows."

Support from Foreign Inflows, Crude Prices

The rupee’s strength was further reinforced by robust foreign institutional inflows into Indian equities, which remained resilient even amid global volatility. Foreign investors bought ₹2,300 crore worth of shares in the last two sessions, according to provisional stock exchange data.

Lower global crude oil prices also played a role, easing concerns over India's trade deficit. Brent crude futures slipped below $82 per barrel, as signs of slowing demand in China and rising inventories in the US capped prices.

India, being a major importer of oil, benefits from lower crude prices as they reduce the current account deficit and inflationary pressures.

RBI Seen Watching, Not Intervening Aggressively

Despite the appreciation, the Reserve Bank of India (RBI) is expected to maintain a cautious approach. While it has been known to intervene to prevent excessive volatility, analysts believe the central bank may allow a gradual appreciation of the rupee if global conditions remain supportive.

“There’s no indication of aggressive RBI intervention today,” said Radhika Rao, Senior Economist at DBS Bank. “The central bank seems comfortable with a range-bound rupee, especially if the broader macroeconomic fundamentals and external balances are stable.”

India’s forex reserves, which stood at $655 billion as of last week, give the RBI ample firepower to manage sharp volatility if needed.

Investor Outlook: Can Rupee Sustain the Gains?

Looking ahead, investors remain cautiously optimistic about the rupee’s prospects. While global tailwinds such as a softer dollar and strong foreign inflows support the currency, potential headwinds include geopolitical risks, volatile commodity prices, and India’s upcoming macroeconomic data.

Key triggers for the rupee this week include:

• US jobs report (non-farm payrolls) due Friday

• Crude oil inventory updates

• Domestic services PMI data

• Equity market performance and FII behavior

“If the Fed signals easing in its tone, and India continues to see positive capital inflows, the rupee could test ₹82.60-82.70 levels in the near term,” said Madhavi Arora, Lead Economist at Emkay Global.

However, she cautioned that any resurgence in US inflation or global risk aversion could quickly reverse gains.

The Indian rupee’s recent rise is reflective of a broader trend among Asian currencies, propelled by growing skepticism over the Fed’s ability to maintain its hawkish stance. While the rally is underpinned by sound fundamentals such as foreign inflows and easing crude prices, it remains susceptible to global economic surprises. For now, traders and investors are watching the US data calendar and Fed commentary closely to gauge the rupee's next move.