The Indian rupee's relative calm over the past two weeks has led currency traders to believe that the Reserve Bank of India (RBI) is back to employing its traditional methods of maintaining stability in the foreign exchange market. This stability is occurring even amidst broader volatility in the foreign exchange market.
The rupee has been trading within a tight range, showing very little movement, while other Asian currencies have experienced choppy and unpredictable movements. The dollar index has also risen sharply, supported by a steep decline in the Japanese yen. However, the rupee's muted response highlights the impact of the RBI's steady intervention. The rupee was at 88.78 per U.S. dollar recently, barely changed from the previous day. The pair has remained within a narrow band, mirroring the calm that has defined trading through the week.
The RBI appears to be actively defending the 88.80 level against the U.S. dollar. Bankers indicate that the central bank has been aggressively selling dollars whenever the USD/INR exchange rate nears this mark. This intervention aims to ensure that the rupee does not depreciate further and that the currency pair does not move above this level. The central bank's actions have reduced the rupee's sensitivity to regional currency trends and the strength of the U.S. dollar.
Market participants say the central bank appears comfortable managing a slow, controlled depreciation. The RBI's persistent intervention has effectively crushed rupee volatility. The 10-day annualized realized volatility has fallen to multi-month lows, while the one-month implied has slipped close to its year-to-date trough.
The RBI's intervention strategy involves a multi-pronged approach. It sells dollars in both onshore spot markets and offshore non-deliverable forwards (NDFs). The NDF market allows the RBI to influence rupee expectations without directly affecting domestic liquidity or reserves. The central bank often times its intervention just before the 9:00 AM IST opening of domestic markets to preempt speculative positioning.
While the RBI's interventions have provided stability, they have also led to a depletion of forex reserves. For example, India's forex reserves fell by $9.3 billion in one week in August 2025, with a significant portion attributed to spot dollar sales. Despite the fall, reserves still cover over 11 months of imports, offering a buffer against further volatility.
The current situation presents both opportunities and challenges. The rupee's stability helps steady market sentiment and discourages wild speculative moves. However, persistent dollar demand from importers, particularly oil companies, remains firm, while equity outflows continue to weigh on the rupee. Furthermore, global factors such as rising oil prices and elevated US Treasury yields add to the challenges.
