The Indian rupee ended little changed against the dollar on Friday but posted a weekly decline as rising oil prices increased pressure on the currency and investors continued to assess the impact of the Iran war on India’s import bill.
The rupee closed at 95.69 per dollar, almost unchanged on the day and down about 0.3% for the week. It remained above the psychologically important 96-per-dollar level, helped by frequent intervention from the Reserve Bank of India.
Brent crude futures were heading for a second consecutive weekly gain, rising more than 5% during the week to around $92.90 a barrel. Higher oil prices are particularly important for India because the country imports the bulk of its crude requirements, making energy prices a major influence on its trade balance, inflation and demand for dollars.
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The RBI’s sustained presence across different parts of the foreign-exchange market has also significantly reduced currency volatility. The rupee’s two-week realized volatility has fallen below 2%, placing it among the least volatile Asian currencies.
The stability, however, does not necessarily indicate that pressure on the rupee has disappeared. Instead, traders say the RBI has been actively smoothing currency movements, limiting both sharp declines and significant gains.
The central bank has also strengthened its ability to manage external pressures through foreign-currency mobilization measures announced in June. Bankers and analysts estimate that the measures have generated more than $50 billion in inflows, while the RBI is expected to attract at least $80 billion through the broader programme.
“With the RBI expecting at least US$80bn from its foreign currency mobilization measures, the external buffer should remain supportive of the INR,” MUFG said in a note.
“However, the record forward position and associated liquidity management suggest that the RBI will continue to prioritize orderly currency movements rather than outright appreciation.”
The RBI’s net forward dollar liabilities stood at $103.3 billion at the end of June, highlighting the extent to which the central bank has been using forward-market operations as part of its currency-management strategy.
RBI Governor Sanjay Malhotra said earlier this week that the central bank’s net forward position was manageable.
“The net forward position that we have right now is very manageable,” Malhotra said in a media interview.
The RBI’s approach means traders are increasingly viewing the rupee through the lens of managed stability rather than a straightforward response to global market movements. A weaker dollar typically provides support to emerging-market currencies, but the rupee has struggled to capture those gains.
A broadly weaker dollar helped lift most Asian currencies on Friday, but the rupee barely moved.
An FX salesperson at a foreign bank said the rupee’s reaction to global developments had become muted because the currency had remained relatively stable even during periods of adverse external conditions.
“The currency’s response to global cues has become muted since it did not weaken in an adverse set up so there is little appetite for gains when conditions improve and importer demand picks up instead,” the salesperson said.
Oil remains the most immediate external risk. With Brent crude approaching $93 a barrel and on course for a weekly gain of more than 5%, any further disruption to energy supplies linked to the Iran war could increase India’s demand for foreign currency to pay for imports.
Higher crude prices can also widen India’s trade deficit and increase imported inflation, potentially complicating monetary policy at a time when policymakers are balancing economic growth against price pressures.
The RBI therefore faces a delicate balancing act. Allowing the rupee to weaken too quickly could amplify the impact of expensive oil on inflation and the current account, while excessive intervention to defend the currency could increase the cost of maintaining foreign-exchange liquidity.
For now, the central bank’s sizeable reserves and foreign-currency mobilization programme provide a substantial buffer. But the combination of elevated oil prices, persistent importer demand and geopolitical uncertainty means pressure on the rupee is likely to remain even as the RBI succeeds in keeping daily moves unusually subdued.
The key distinction for markets is that the RBI appears more focused on preventing disorderly depreciation than engineering a sustained appreciation of the rupee. That policy stance helps explain why the currency has remained relatively stable around the 96-per-dollar threshold while other Asian currencies have responded more sharply to movements in the dollar and global risk sentiment.