The Indian rupee's surge to its most significant weekly gain in seven years has analysts suggesting the Reserve Bank of India (RBI) may seize a valuable opportunity to rebuild its foreign exchange reserves, a move that could potentially cap the currency's further appreciation following the positive news of a US-India trade agreement. Institutions including Barclays and Nomura Holdings predict the Indian central bank will utilize this period of rupee strength to purchase US dollars. Both firms have recommended short positions on the rupee—Nomura forecasts the rupee could depreciate to 94 against the US dollar by May, while Barclays advises targeting this level via three-month offshore positions.
On Tuesday, the rupee surged 1.4% against the dollar, transforming from last month's worst-performing Asian currency to the region's strongest. Although the RBI has historically utilized dollar inflows to bolster reserves, the foreign exchange strategy of the current Governor, Sanjay Malhotra, is considered more unpredictable, adding complexity to assessing the current rebound. "The path ahead for the rupee may not be smooth," noted Joey Chew, head of Asian FX research at HSBC Holdings, indicating that the RBI's FX policy could complicate the situation as it has "intervened in unpredictable ways in recent months to prevent one-way speculative positioning in the rupee."
As of last December, the RBI held a substantial net short forward position of $624 billion, indicating a need to repay these dollars. Chew stated that the central bank's unwinding of approximately $250 billion in positions during the second quarter of 2025 was a primary reason for the rupee's weakness at that time. Last year, the RBI aggressively sold dollars (Nomura estimates net sales of $495 billion) to support the rupee. Despite this, India's foreign exchange reserves have climbed to a record high of $709 billion, aided by a weaker dollar, soaring gold prices, and the central bank's FX swap operations.
"A key point to watch is the exchange rate level at which the RBI might start buying dollars to rebuild reserves," said Dhiraj Nim, a forex strategist at ANZ in Mumbai. In recent months, the RBI has intervened by purchasing rupees when the currency repeatedly tested lower levels. Central bank officials have consistently emphasized that the exchange rate is market-determined, with their role limited to maintaining orderly market conditions and curbing excessive volatility.
Governor Malhotra remarked in a television interview last month that, considering inflation differentials between India and major economies, an annual depreciation of 3% for the rupee "falls within a normal range." Barclays advises clients to tactically short the rupee, believing the current rally is unsustainable and that equity outflows will not fully reverse. Mitsubishi UFJ Financial Group recommends clients establish long USD/INR positions over the medium term.
Nonetheless, the trade agreement is expected to provide short-term support for the rupee and benefit the bond market, as traders bet on foreign capital returning to domestic assets. Societe Generale analysts anticipate the rupee will strengthen to 87-88 in the coming weeks, while HSBC predicts it will reach 88 by the end of March. "The primary impact on the bond market will be transmitted through the foreign exchange market and the RBI's intervention strategy," wrote Nomura strategist Nathan Sribalasundaram in a report, adding that "short-term capital inflows offer the RBI an opportunity to rebuild reserves and inject rupee liquidity."
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