Indian Rupee: Range-Bound vs Dollar as Inflows Offset Trade Drag – DBS

DBS Bank economist Radhika Rao's latest analysis indicates that the Indian rupee's exchange rate against the U.S. dollar has recently shown a clear range-bound pattern, with strong capital inflows failing to translate into significant appreciation of the local currency. Despite India attracting various capital inflows, including FCNR (B) swap funds, which have pushed foreign exchange reserves higher, the USD/INR pair has remained confined to a narrow band of 95.50 to 96.00.

**Bull-Bear Forces Intertwine to Create a Stalemate**

The rupee's standoff stems from intense competition between bullish and bearish forces. On one hand, improved portfolio flows, sustained allocation demand from foreign investors for Indian government bonds, and central bank measures such as currency swaps for corporates with overseas borrowing needs collectively underpin the rupee. However, these tailwinds have been largely offset by spot-neutral swap flows, corporate hedging demand, and official intervention.

**Trade Deficit Poses Core Drag**

The persistently high merchandise trade deficit is the core structural factor weighing on the rupee. Recently, amid geopolitical tensions, crude oil prices have consolidated at elevated levels around $90 per barrel, directly worsening the trade balance outlook for India, a major crude importer, and exerting sustained pressure on the rupee. Market sources indicate that while the Reserve Bank of India still uses direct dollar sales as a last-resort tool to stabilize the currency, its strategy has shifted toward more diversified measures to attract capital and balance the balance of payments.

**Short-Term Trend Likely to Extend Range-Bound Moves**

Looking ahead, the rupee is likely to continue its current range-bound pattern in the near term. Although India's solid economic fundamentals and the central bank's willingness to intervene provide downside protection for the rupee, elevated oil prices and rising global risk aversion cap its upside. At the time of writing, USD/INR is trading near 95.52, still within the fluctuation range previously mentioned by DBS, indicating that the market awaits clearer breakout signals.