Topic 4: RUPEE: CARTWHEELING

The Indian Rupee (INR) depreciated moderately against the US Dollar (USD) in February 2026, weakening by around 0.5–1.3%. USD/INR started the month near 90.70–90.75 and gradually rose, reaching 91.30–91.59 by early March. This decline was measured, staying well below January’s peak of 92.29, and reflected a controlled adjustment rather than abrupt volatility. The weakening rupee was primarily driven by global dollar strength. The US dollar index (DXY) firmed as the Federal Reserve adopted a cautious “higher-for-longer” rate outlook, with fewer expected cuts in 2026. Elevated US real yields and speculation about a more hawkish policy stance further bolstered the dollar. Consequently, emerging market currencies including the rupee faced sustained external pressure. Despite intermittent foreign inflows that provided brief support, the overall trend was towards gradual depreciation, highlighting how global monetary policy shifts and strong US yields shape currency movements in India.

Domestically, the Union Budget 2026 added another layer of caution. The government’s announcement of record gross market borrowing of around ₹17.2 trillion for FY27 triggered concerns about fiscal supply, current account pressures, and sustained dollar demand from importers. While the Budget reaffirmed fiscal consolidation targets, the scale of borrowing heightened expectations of continued foreign currency demand, particularly from oil marketing companies and large importers hedging exposures. With crude oil trading above $70 per barrel for much of the month, India’s oil import bill remained elevated, structurally increasing dollar demand in the domestic forex market. Foreign portfolio investor (FPI) flows presented a mixed dynamic. Although FPIs were net buyers of Indian equities to the tune of roughly ₹22,000 crore during February, overall forex demand remained tilted toward the dollar. Debt inflows, oil-related payments, and safe-haven positioning amid Middle East geopolitical tensions kept underlying USD demand firm. Additionally, higher US yields marginally reduced the relative carry attractiveness of rupee-denominated assets, even though the Reserve Bank of India’s repo rate stood at 5.25%. This dynamic limited the positive impact that equity inflows might otherwise have had on the currency. Stabilising forces, however, were equally important in containing the rupee’s downside. The Reserve Bank of India maintained a steady monetary policy stance in February, keeping the repo rate unchanged at 5.25% and signalling liquidity comfort. System liquidity remained in surplus, anchoring short-term rates and supporting investor confidence in macro stability. Market participants widely believe that the RBI conducted calibrated interventions in both spot and non-deliverable forward (NDF) markets — potentially in the range of $5–10 billion — to prevent excessive volatility. These actions appeared effective in defending the 91.50–92.00 zone, ensuring that depreciation remained gradual and contained rather than abrupt.

As a result, USD/INR traded within a relatively tight monthly range of approximately 90.65–91.60, a notable contrast to the sharper swings observed in equity and commodity markets during the same period. Compared to several Asian peers such as the Korean won or Indonesian rupiah, the rupee demonstrated relative resilience, reflecting India’s stronger macro fundamentals, steady growth outlook, and proactive central bank management. In essence, February 2026 was characterised not by rupee instability, but by controlled depreciation shaped by global dollar strength, fiscal supply optics, and oil dynamics — offset by credible policy and vigilant intervention that kept currency volatility firmly in check.