Rupee lashes after RBI intervenes. What awaits investors in Dalal Street?

The Indian rupee shocked markets on Wednesday after the Reserve Bank of India (RBI) intervened aggressively to halt a one-way decline, leading to a sharp intraday reversal that reflected how fragile sentiment has become.The rupee rose from near 91 to an intraday high of 89.75 per dollar before falling to around 90.28 even as foreign outflows, uncertainty over trade deals and policy signals kept investors guessing about the road ahead.

Bankers said the central bank sold dollars heavily in the spot and non-deliverable forward (NDF) markets, reflecting its interventions in October and November that disrupted ongoing depreciation. The move came after the rupee underperformed against Asian peers, weakening 1.8% from December through Tuesday, while most regional currencies were flat or slightly higher.Wednesday’s trading was volatile, with support from falling crude oil prices offset by uncertainty over the India-US trade deal and continued foreign sales.

Flows, and not fundamentals, are at the wheel

At a practical level, flows from foreign portfolio investors (FPIs) are the deciding factor, Bank of Baroda said, noting that FPIs were net sellers in nine of the first 11 trading days of December. “If they pull out, wait for a trigger for a reversal, which could be the deal,” the bank said, adding that expectations of a possible deal in March 2026 could keep the rupee volatile in the meantime. The bank signaled that the dollar index remains below 100, which is generally supportive for emerging market currencies, making the rupee’s weakness stand out.

Bank of Baroda also pointed to relative stock performance as a factor diverting capital flows. While major global indices have posted strong gains over the past year, the Indian benchmark has lagged, fueling the perception among some investors that valuations need gains to catch up. Trade balance fears are less compelling given better November data, while the RBI’s reserve trajectory suggests dollars were built up earlier and released through sales as policy priorities evolved.

Balance of payments under pressure

Mirae Asset Mutual Fund has framed the recent downturn as a balance of payments story amplified by policy and external shocks. It said the USD/INR breach of 90 was due to the convergence of weak FPI and FDI flows, a shift in currency intervention strategy and uncertainty over trade deals. The balance of payments deficit remains at minus $22 billion in FYTD26 through November, the largest in history, due to a sharp slowdown in capital inflows.

While the current account deficit remains low, at around 0.8% of GDP in the first half of FY26, Mirae warned that comfort is waning as gold imports rise and tariff tensions begin to cut. Exports to the US of tariff-hit items have fallen sharply since September, the report says, even as strong inflows of services and remittances soften the blow. On the policy front, Mirae noted that RBI dollar sales in FYTD26 are much lower than last year, reflecting a more measured approach even as reserves remain ample.

What should investors do now?

Market participants urged investors to look past the noise. “With the rupee falling to 91.075 per dollar, Indian investors should focus on disciplined investing rather than reacting out of fear amid currency weakness and volatile equity markets,” said Ross Maxwell, Global Strategy Operations Lead at VT Markets.

Maxwell recommended prioritizing companies with strong balance sheets and investing systematically to weather volatility, while keeping gold as a hedge. Export-oriented sectors such as IT services, pharmaceuticals and select tech exporters typically see margin support during depreciation, he said, while caution is needed in import-dependent businesses.

Sachin Sawrikar, Founder and Managing Partner at Artha Bharat, said the rupee’s move to a record low is “mainly driven by global factors and not so much by India-specific concerns”, noting that several peers have reported similar or larger declines.

“In comparison, the rupee’s movement has been relatively orderly,” Sawrikar said, adding that a weaker currency improves the competitiveness of exporters and FDI will remain largely unaffected by short-term volatility. Looking ahead, he expects the rupee to stabilize in 2026 as global monetary conditions ease and capital flows normalize.

For Dalal Street, Wednesday’s intervention brought a reminder: the RBI will act to curb disorderly movements, but will not defend a level. With FPIs still selling – FIIs sold nearly Rs 2,382 crore worth of equities as of December 16 – the rupee’s path will depend on flows, policy signals and progress in trade talks. Volatility, investors are told, is not a signal to retreat, but a test of discipline.

(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of the Economic Times)