The Reserve Bank of India stepped into the currency market again on Friday, continuing a pattern that traders have seen throughout the week: dollar selling near the start of the session to support the rupee. The currency opened around 94.46 to the dollar and has gained close to 1% over the week, an unusual performance given the pressure coming from higher oil prices and weakness across several Asian currencies.
The change in market psychology comes from an extraordinary pool of dollars that has recently entered the system. RBI-backed schemes attracted more than $136 billion, far above initial expectations. A large share came through foreign-currency deposits raised from non-resident Indians and swapped with the central bank.
That matters because a central bank defending its currency needs usable foreign-exchange firepower. When the RBI sells dollars and buys rupees, it can reduce sudden demand for dollars and smooth a fall in the domestic currency. The larger the buffer, the more confidently it can intervene during periods of stress.
This week, traders told Reuters that the RBI's repeated presence has made its preference clearer. The central bank does not appear to be defending a single fixed level, but the market increasingly believes it is willing to lean against depreciation and, where conditions allow, guide the rupee stronger.
The complication is oil. India imports most of the crude it consumes, so higher prices create more demand for dollars from refiners and can widen the trade deficit. Brent crude moved above $96 a barrel as US-Iran hostilities intensified. In a normal week, that combination would be a significant headwind for the rupee.
There is also a domestic side effect to the dollar inflows. When banks swap their new foreign-currency deposits with the RBI, rupees are released into the banking system. That helped push surplus liquidity to a record level, creating a separate challenge for monetary policy. The RBI now has more foreign-exchange ammunition, but it also has to manage the excess rupees created by the operation.
This is why the story is not simply that the rupee strengthened. The deeper shift is that India's central bank has changed the balance of power in the currency market. It has more room to intervene just as global risks are rising. Whether that advantage lasts will depend on oil, US interest rates, foreign capital flows and how effectively the RBI manages the liquidity created at home.