Rupee seen gaining further as RBI likely to stay on sidelines after trade-driven rally
The Indian rupee may have more room to appreciate in the coming months and the Reserve Bank of India (RBI) is unlikely to actively intervene in the near term, according to Bank of America, as supportive seasonal trends, foreign portfolio flows and a comfortable reserve position strengthen the currency’s outlook.
Vikas Jain, Head of India FICC Trading at Bank of America, said the dynamics in the foreign exchange market have shifted following the US–India trade deal, which has boosted sentiment toward Indian assets and the rupee.
“Since the announcement of the trade deal with the US, the dynamics of the currency market have clearly changed. Sentiment-driven demand for the rupee has strengthened,” Jain said in an interview.
Trade deal and seasonal factors reshape rupee trajectory
The rupee has rallied sharply in recent sessions, aided by improving sentiment after the trade agreement with the United States. According to Jain, while the move has been partly sentiment-driven, broader macro factors may continue to support the currency.
He highlighted three variables investors are watching:
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Direction of foreign portfolio investor (FPI) flows
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Timing and pace of recent currency moves
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RBI’s approach to intervention and reserve accumulation
“We believe FPIs will reduce their selling and some buying could come in over the next few quarters,” Jain said, adding that exporters may also raise their hedging ratios.
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February–March seasonality and current account seen as supportive
Seasonal patterns are another supportive factor. February and March are typically strong months for the rupee, partly due to corporate flows and balance-of-payments dynamics.
“Yes, February and March are generally seasonally positive months. We expect the current account to be positive as well, which should support the rupee,” Jain said.
A positive current account balance tends to reduce pressure on the currency by improving foreign exchange inflows relative to outflows.
RBI unlikely to aggressively rebuild reserves for now
Despite the rupee’s sharp intraday appreciation earlier this week, Bank of America does not expect the RBI to step in aggressively.
India’s forex reserves currently cover roughly eleven months of imports, a level considered comfortable by global standards.
“While we are at a high level of reserves, we are not expecting the RBI to start accumulating anytime soon,” Jain said. He added that because the rupee has previously depreciated against major currencies, there is still room for appreciation.
RBI’s forward book gives policy flexibility
The RBI’s foreign exchange forward book, often tracked as an indicator of intervention strategy, is largely positioned in longer maturities.
According to Jain:
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Much of the book sits in the three-year segment
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Some positions have rolled into two-year maturities
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Near-term maturities are limited to the next two months
This staggered maturity profile gives the RBI flexibility in managing rollovers or allowing contracts to run off.
“In our view, the RBI is likely to roll over those maturities. Overall, I am not too concerned about the forward book at this stage,” he said.
Here’s what happened today and why traders reacted
Currency traders reacted to a combination of positive cues.
Key drivers included:
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Optimism after the US–India trade deal
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Expectations of FPI inflows into equities and debt
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Perception that RBI will not cap rupee gains immediately
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Seasonal support for the currency
When traders believe the central bank is less likely to intervene, it often encourages directional bets in the currency market.
Bond market response remains muted despite currency strength
While the rupee has strengthened, India’s bond market reaction has been relatively limited.
Jain noted that the trade deal does not directly alter bond market fundamentals. Instead, yields have been shaped more by fiscal dynamics.
“Bond yields are higher mainly because the market was surprised by the gross borrowing number in the Budget,” he said.
Post-Budget, yields rose several basis points, with only a partial retracement since. The 10-year government bond yield is around 6.72%, carrying a sizable premium over the policy rate.
Liquidity surplus reduces need for RBI intervention
Banking system liquidity remains in surplus, which reduces the need for aggressive RBI operations.
Jain expects:
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Surplus liquidity to reach around ₹3 lakh crore by the end of the week
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Continued support from government spending
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Surplus liquidity around 1.5% of net demand and time liabilities (NDTL)
“If liquidity is required, RBI will provide it. But if surplus persists, RBI may not need further OMOs or buy-sell swaps,” he said.
He also noted that sustained surplus liquidity is necessary for effective distribution across banks.
What this means for investors and portfolios
For investors, a stronger rupee can have mixed implications.
Potential portfolio effects include:
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Support for foreign investor sentiment toward Indian assets
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Lower imported inflation pressures
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Currency headwinds for export-oriented sectors
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Improved visibility for foreign debt investors
Equity and debt flows could see renewed interest if currency stability holds.
What to watch ahead of RBI policy and global shifts
Looking ahead, market participants are tracking:
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RBI’s next policy signals on liquidity
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FPI flow trends in equities and bonds
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Sustainability of current account dynamics
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Global dollar movement
On monetary policy, Bank of America does not expect a rate change in the upcoming RBI meeting.
“We are not expecting any change in rates. On liquidity, RBI will commit as much as the system requires,” Jain said.
For now, the combination of seasonal strength, supportive flows and a non-interventionist RBI stance has tilted near-term sentiment in favour of the rupee. Whether that momentum sustains will depend on how global and domestic flows evolve in the weeks ahead.
