Topic 4: RUPEE: HOLDING ON

The Indian rupee had a choppy but largely range-bound trading pattern in August 2026, remaining under pressure for most of the month but ending only marginally weaker against the US dollar. USD/INR opened the month at around ₹95.40 and traded within a relatively narrow but volatile range. The rupee strengthened to approximately ₹94.84 on August 5, supported by a temporary decline in crude-oil prices following the Reserve Bank of India's policy decision, but subsequently weakened as oil prices and global risk concerns resurfaced. The currency touched around ₹96.00 on August 24 before recovering towards the end of the month. Overall, USD/INR closed August near ₹95.17–₹95.60, depending on the market reference used, implying only a marginal monthly depreciation of roughly 0.1–0.5%. Despite this limited monthly movement, the rupee remained close to historically weak levels and had depreciated significantly over the preceding year.

The principal pressure on the rupee came from fluctuations in crude-oil prices amid continuing geopolitical tensions in the Middle East. Brent crude remained elevated for much of August as concerns over the Strait of Hormuz and uncertainty surrounding the US-Iran situation periodically intensified. Oil prices moved towards the high-$80s and, at times, closer to $90 per barrel before easing as geopolitical concerns moderated. Given India's dependence on imported crude, higher oil prices directly increase the country's import bill and demand for US dollars, placing downward pressure on the rupee. Conversely, temporary declines in crude prices provided short-lived relief to the currency. Sustained dollar demand from importers also weighed on the rupee, as Indian companies needed foreign currency to settle import bills and meet their external obligations. Maturing positions in the offshore non-deliverable forward (NDF) market further contributed to intermittent dollar demand.

Global monetary and financial-market conditions added to the pressure. The US dollar remained relatively firm during parts of August as elevated US Treasury yields and uncertainty surrounding the Federal Reserve's future policy direction encouraged demand for the dollar. Higher US yields reduce the relative attractiveness of emerging-market assets and can trigger capital outflows, thereby weighing on currencies such as the rupee. Periodic risk-off sentiment in global markets, coupled with selling by foreign portfolio investors in Indian equities, also generated additional demand for dollars.

A key factor preventing a sharper depreciation was active intervention by the Reserve Bank of India. The RBI reportedly continued to manage currency volatility through spot and forward-market operations, selling dollars when pressure on the rupee intensified. This intervention helped contain moves beyond the ₹95.5–₹96 levels and reinforced the perception that the central bank was willing to prevent excessive volatility rather than target a specific exchange-rate level. Strong foreign-exchange reserves provided the RBI with sufficient capacity to smooth the market and absorb temporary demand for dollars.

Foreign-currency inflows through the RBI's special FCNR(B) deposit-related measures also provided support during the month. These inflows strengthened the country's external liquidity position and increased the RBI's ability to intervene in the foreign-exchange market. However, support from these flows began to diminish towards month-end as the special FCNR(B) window was closed earlier than originally scheduled. This reduced one of the temporary cushions supporting the rupee.

Overall, August 2026 was characterised more by managed stability than a clear directional move. Elevated crude prices, geopolitical uncertainty, firm US yields and sustained dollar demand created persistent depreciation pressure, while RBI intervention, strong foreign-exchange reserves and foreign-currency inflows helped absorb much of the pressure. As a result, the rupee remained broadly range-bound and ended the month only marginally weaker, despite trading close to its historical lows. The August experience highlighted the RBI's continued role in smoothing currency volatility and demonstrated how policy intervention and external liquidity buffers can temporarily offset challenging global and domestic fundamentals.

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