Indian Rupee Logs Best Week in Five as RBI Muscle Power, Foreign Deposits Support
The Indian rupee has posted its strongest weekly performance against the U.S. dollar in five weeks, gaining about 0.9% during the week ended September 4. The currency finished Friday at around ₹94.485 per dollar, after trading within a narrow range during the session.
A major reason behind the rupee’s resilience has been aggressive intervention by the Reserve Bank of India (RBI). Traders said the central bank repeatedly sold dollars, particularly around the opening of trading sessions, helping counter demand for the U.S. currency and limiting downward pressure on the rupee.
The RBI’s intervention has coincided with an unexpectedly large inflow of foreign currency through its special dollar-rupee swap arrangements. Between June and August, the schemes attracted more than $136 billion, dramatically exceeding market expectations.
The largest component was Foreign Currency Non-Resident (Bank) deposits, which accounted for roughly $127.2 billion of the inflows. Overseas foreign-currency borrowings contributed about $5.26 billion, while external commercial borrowings added approximately $3.89 billion.
The inflows have effectively strengthened the RBI’s ability to defend the rupee. By bringing more dollars into India’s financial system, the programme has created an additional source of foreign-exchange liquidity at a time when global conditions have been challenging for emerging-market currencies.
The impact is also visible in India’s banking system. The large dollar inflows have been converted or swapped into rupees, contributing to an unusually large surplus of domestic liquidity. Reuters reported that banking-system surplus liquidity reached about ₹9.7 trillion ($102.7 billion) on September 3, exceeding the previous post-pandemic peak.
That liquidity surge, however, creates a new problem for the RBI. Too much rupee liquidity can push overnight interest rates below the policy rate and complicate monetary-policy transmission. The central bank therefore faces the challenge of supporting the currency while simultaneously absorbing excess rupees from the banking system.
The rupee’s gains have come despite an unfavorable oil backdrop. Brent crude moved toward $96 a barrel, recording its strongest weekly increase since mid-July amid renewed tensions involving the United States and Iran. Higher crude prices are normally negative for India because the country relies heavily on imported oil, increasing the dollar demand associated with energy imports.
Market attention is now shifting toward the United States. Upcoming U.S. employment and inflation data could influence expectations for Federal Reserve policy and consequently alter global dollar flows. A stronger dollar or higher U.S. yields could once again put pressure on the rupee.
For now, the combination of heavy RBI intervention, record-scale foreign-currency inflows and strong reserve buffers has given the rupee unusual protection against external pressures. But analysts caution that this support may not permanently reverse the currency’s underlying vulnerabilities, particularly if oil prices remain elevated or global dollar demand strengthens.
The immediate picture is therefore one of RBI-supported rupee stability rather than a complete change in the currency’s long-term trend. The next test will be whether the central bank can maintain this stability while managing the enormous liquidity created by the foreign-currency inflows and navigating renewed oil and U.S. interest-rate risks.
