The Indian Rupee Navigates a Volatile Landscape Amid Rising Forex Reserves

The U.S. dollar/Indian rupee (USD/INR) pair has settled just below the 90‑per‑dollar threshold, a level that has become a focal point for traders and policy watchers alike. On Friday, January 2, 2026, the rupee slipped past the 90 mark, trading in a tight band around 89.92–90.10. This movement came against a backdrop of sustained dollar demand and continued outflows from foreign investors, signalling a delicate balance between domestic liquidity and external pressures.

Central Bank Intervention Keeps the 90‑Mark Intact

Multiple market‑on‑the‑clock reports highlighted that state‑run banks were selling dollars on behalf of the Reserve Bank of India (RBI). Traders noted that this intervention was particularly pronounced on the second day of a two‑day sequence in which the rupee had previously fallen below 90. The RBI’s actions—selling dollars through its state‑owned banking network—were interpreted as a strategic move to cushion the currency against a sharper decline. Despite this support, the rupee’s bid remained volatile, reflecting the underlying uncertainty in the macro‑environment.

Liquidity Conditions and Market Sentiment

The banking system’s liquidity snapshot for January 1 revealed a modest surplus of ₹23,865 crore, markedly lower than the typical ₹100‑150 lakh crore surplus seen at the start of the month. A thinner liquidity base tends to amplify daily supply‑demand imbalances, which in turn can create short‑term pressure on the rupee. Market analysts suggest that the reduced surplus, coupled with persistent dollar demand, contributed to the rupee’s slide past the 90 level.

Growing Forex Reserves Offer a Buffer

In the week ended December 26, India’s foreign exchange reserves rose by $3.293 billion, bringing the total to $696.61 billion. This upward trajectory in reserves provides the RBI with a broader buffer to manage external shocks and intervene in the currency market if necessary. The accumulation of reserves is often viewed as a sign of monetary strength, yet it also underscores the need for disciplined policy execution to prevent excess liquidity from destabilising the exchange rate.

Outlook: Stabilisation or Continued Weakness?

Economic commentators anticipate a year of relative stabilisation for the rupee in 2026, following a turbulent 2025 that saw the currency breach record lows. The outlook hinges on several factors:

  • US–India Trade Negotiations: Progress in trade talks could improve investor sentiment and reduce capital outflows.
  • Capital Flow Direction: Persistent outflows would continue to weigh on the rupee, while inflows could buoy it.
  • Monetary Policy: The RBI’s stance on interest rates and reserve requirements will play a pivotal role in shaping the currency’s trajectory.

Tax Implications for Currency Traders

Amid the market’s focus on policy and liquidity, individual traders must also navigate tax obligations. A recent query from a trader who earned over ₹50,000 in short‑term gains from trading approved currency pairs (USD/INR, GBP/INR, EUR/INR) on the Zerodha platform highlighted the need for clarity on filing income tax returns. While the query itself was addressed in a summarized article by The Economic Times, it underscores a broader issue: currency trading profits are taxable and must be reported accurately in the Indian tax return (ITR). Traders should consult a tax professional to ensure compliance, especially when short‑term capital gains exceed the ₹50,000 threshold.

In summary, the rupee’s brief dip below the 90 mark, despite RBI intervention and rising foreign exchange reserves, reflects a complex interplay of liquidity conditions, market sentiment, and macroeconomic fundamentals. The coming months will test whether the RBI’s policy toolkit can maintain stability or whether external pressures will push the currency further into a bearish trend.