Indian Rupee sees the biggest gain in seven years, potentially triggering a wave of rebuilding of the central bank's US dollar reserves.

With the rupee registering its strongest gain in seven years, analysts point out that the Reserve Bank of India (RBI) may have valuable space to rebuild its foreign exchange reserves, which could limit the further upside for the rupee after the favorable impact of the India-US trade agreement is realized. Institutions such as Barclays Bank and Nomura Holdings predict that the Indian central bank will take advantage of this round of rupee rebound to purchase dollars. Both institutions recommend shorting the rupee Nomura expects the rupee exchange rate to depreciate to 94 against the US dollar by May, while Barclays suggests betting on this target through offshore positions for three-month periods. On Tuesday, the rupee surged by 1.4% against the US dollar, going from the worst-performing currency in Asia last month to the strongest currency in the region. Although the Reserve Bank of India has traditionally used inflows of dollars to expand reserves, the foreign exchange strategy of current governor Shaktikanta Das appears more unpredictable, adding difficulty to assessing the rebound of the exchange rate in this round. " The road ahead for the rupee is not necessarily smooth," Joey Chew, head of Asian FX research at HSBC Holdings, pointed out, India's central bank's foreign exchange policy could complicate the situation, as it has been "intervening in unpredictable ways in recent months to prevent speculative positions on the rupee." As of December last year, the Indian central bank held a massive short-term forward net short position of -62.4 billion US dollars, meaning that it needs to repay these dollars. Chew stated that the Indian central bank's closure of around 25 billion US dollars in the second quarter of 2025 was the main reason for the rupee's weak performance at that time. Last year, the Indian central bank sold a significant amount of dollars (Nomura estimated a net sale of 49.5 billion US dollars) to support the rupee. Nevertheless, under the conditions of a weakening dollar, soaring gold prices, and central bank forex swap operations, India's foreign exchange reserves have climbed to a historical high of 709 billion US dollars. " The key observation point is at what exchange rate level the Indian central bank may purchase dollars and rebuild reserves," said Dhiraj Nim, a forex strategist at ANZ Bank Mumbai. In recent months, when the rupee tested lower levels multiple times, the Indian central bank intervened by buying rupees. Central bank officials have repeatedly emphasized that the exchange rate is determined by the market, and their responsibility is only to maintain orderly market operation and curb excessive fluctuations. In an interview on television last month, Governor Shaktikanta Das stated that considering the inflation differences between India and major economies, an annual depreciation of 3% for the rupee is "normal." Barclays recommends tactically shorting the rupee, as they believe the current trend is unsustainable and capital outflow from the stock market will not completely reverse. Mitsubishi UFJ Bank suggests that clients establish a long position in the US dollar/rupee in the medium term. However, as traders bet on foreign capital returning to the domestic assets, the trade agreement will still provide short-term support for the rupee and benefit the bond market. Analysts at France's Industrial Bank predict that the rupee will strengthen to 87-88 in the coming weeks, while HSBC predicts it will reach 88 by the end of March. "The main impact on the bond market will be transmitted through the foreign exchange market and the intervention strategy of the Reserve Bank of India," wrote Nomura strategist Nathan Sribalasundaram in his report, "Short-term capital inflows provide the RBI with an opportunity to rebuild reserves and inject liquidity into the rupee."