Topic 4: RUPEE: MACRO HEADWINDS
The Indian rupee came under significant pressure in
January 2026, depreciating sharply against the US dollar
amid heightened volatility and global risk aversion. The
currency weakened from around 89.96 at the start of the
month to approximately 91.39 by early February, marking
a monthly decline of nearly 1.6% and extending its
12-month depreciation to over 5%. USD/INR opened the
month near the 90 mark but breached critical resistance
levels during mid-January as risk sentiment deteriorated.
The pair surged past 91 between January 28 and 30
before stabilising near 91.39 after month-end. The speed
of the move reflected strong dollar demand and limited
appetite for emerging-market currencies during the
period.
Foreign portfolio investor (FPI) outflows were a major
drag on the rupee. FIIs sold equities worth ₹41,435 crore
during the month, while debt markets saw outflows of
approximately $1.5 billion as global investors shifted
toward higher-yielding US Treasuries, with the US 10-year
yield near 4.8%.
Geopolitical tensions further intensified pressure. US
President Donald Trump’s threat of imposing 100% tariffs
on Indian imports—linked to India’s Russian oil
purchases—triggered risk aversion and strengthened the
US dollar, with the Dollar Index rising about 1.5%. Given
India’s heavy reliance on Russian crude, the rupee
remained particularly vulnerable to these trade-related
concerns.
On domestic front, expectations of higher government
borrowing pushed bond yields higher, with the 10-year
G-Sec yield climbing to 6.72%. This diverted liquidity and
indirectly added to dollar demand. Meanwhile, inflation
hovering around 5.5% reduced expectations of near-term
rate cuts, limiting policy support for the currency.
The Reserve Bank of India played a stabilising role by
intervening selectively to curb excessive volatility rather
than defend a fixed exchange rate. The RBI reportedly
sold around $30 billion from its forex reserves, which
declined to approximately $620 billion, primarily when
USD/INR breached the 90–91 zone. Complementary
dollar-rupee swaps and liquidity operations helped offset
the tightening impact on the banking system.
While these actions prevented a sharper slide beyond the
₹92 level, the RBI allowed a gradual depreciation to
absorb external shocks and support export
competitiveness. The rupee’s weakness also lifted
import costs, contributing to strong rallies in bullion and
commodities during the month.
