Indian Rupee: RBI support tempers depreciation risks versus US Dollar - MUFG

Reserve Bank of India (RBI) measures to support the Indian Rupee (INR) in June 2026 have tempered the risks of sharp depreciation against the US Dollar (USD), according to MUFG's Michael Wan. The bank notes the large build-up of foreign exchange (FX) reserves and liquidity, which have reduced the tail risk of INR depreciation. However, MUFG still anticipates a gradual rise in USD/INR throughout 2027, with the INR underperforming other Asian currencies.

As of August 31, 2026, the amount of dollars attracted through various facilities, including FCNR(B) deposits, stood at a significant US$136 billion and likely continues to rise. This substantial influx of dollars made it prudent for the RBI to have closed the FCNR(B) facility earlier than initially planned.

It is worth mentioning that without active intervention by the RBI in the INR FX market, there is no spot FX transaction. Consequently, it is not surprising that USD/INR did not experience significant movement in the initial stages. While the Dollar inflows provide the RBI with greater firepower to defend against INR weakness, they also introduce their own set of challenges, primarily related to INR liquidity management.

From an FX perspective, MUFG believes that the RBI's measures have significantly reduced the left tail risk of sharp INR depreciation. However, considering the strong underlying demand for the USD, including from gross foreign direct investment (FDI) repatriation and a robust pipeline of Initial Public Offerings (IPOs), the bank maintains its forecast of a gradual depreciation in the INR against the USD.

MUFG forecasts USD/INR at 95.50 by December 2026 and 96.50 by June 2027, suggesting a modest underperformance against other Asian currencies.

In summary, RBI's support measures have mitigated the risk of significant INR depreciation against the USD, allowing for a more gradual depreciation trend. Nonetheless, the outlook remains cautiously optimistic, with USD/INR expected to rise throughout 2027 due to strong Dollar demand.