Exchange Dynamics and Monetary Policy Implications

The Indian rupee (INR) slipped to a 90‑level against the U.S. dollar (USD) early on Monday, 12 January 2026, as a confluence of domestic and international factors weighed on sentiment. The pair traded near 90.20 INR per USD by 11:00 a.m. IST, a slight but persistent drift from the 52‑week high of 91.07 INR seen on 15 December 2025. The close on 8 January was 89.9054 INR, underscoring a gradual but steady devaluation trend.

1. Market‑Driven Liquidity Injection

The Reserve Bank of India (RBI) announced a sizeable liquidity infusion of ₹50 000 crore into the banking system through an Open Market Operation (OMO) purchase auction. Market participants offered to sell ₹1 22 525 crore of government securities, well above the ₹50 000 crore notified amount. The RBI’s purchase comprised ₹9 123 crore of 7.04 % GS 2029 bonds and ₹9 637 crore of 6.79 % bonds, among others.

This aggressive buying was intended to ease funding pressures and support the rupee. However, the sheer volume of securities sold by market participants—nearly a quarter of the RBI’s purchase amount—suggests a robust appetite for liquidity. The injection may help stem the current outflows, yet the immediate impact on the exchange rate has been muted, as foreign institutional investors (FIIs) continue to pull capital amid broader macro‑risk concerns.

2. External Headwinds: Oil Prices and Geopolitics

Oil prices surged on Monday, driven by tensions in the Middle East. Higher crude costs translate into a cost‑of‑carry advantage for the rupee, exerting downward pressure. Analysts note that the rupee’s relative weakness against the Chinese yuan has also been reinforced by divergent monetary stances—China’s policy easing versus the U.S. Fed’s hawkish tilt.

The U.S. dollar itself has been volatile, partly because of a public rift between President Donald Trump and Federal Reserve Chair Jerome Powell. The ensuing uncertainty has amplified the rupee’s vulnerability, as investors seek safe‑haven assets or hedge their foreign‑currency exposure.

3. Domestic Equity Market Weakness

Weak equity performance has compounded the rupee’s woes. A declining equity market reduces foreign portfolio inflows and can trigger portfolio rebalancing, thereby draining the rupee. The rupee’s proximity to record‑low levels against the yuan is a warning signal: a prolonged divergence between the two Asian currencies may reflect sustained capital outflows from India.

4. Forward Market Sentiment

The 1‑month non‑deliverable forward (NDF) range of 90.22–90.27 indicates market expectations that the rupee will remain in the high‑90s in the near term. This forward bias reflects the combined pressure from oil, equity weakness, and FII outflows, tempered by the RBI’s liquidity stance.

5. Forward‑Looking Assessment

While the RBI’s OMO injection injects a fresh supply of rupees into the financial system, the market’s confidence in the currency is still fragile. If the rupee continues to trade near its 52‑week high, any further deterioration in global risk appetite—whether from geopolitical escalation or tightening U.S. monetary policy—could accelerate a run on the rupee. Conversely, sustained domestic liquidity provision and a reversal in oil price dynamics could stabilize the currency.

In summary, the rupee’s current trajectory reflects a delicate balance: the RBI’s active market participation seeks to shore up liquidity, yet external shocks from oil, geopolitical tensions, and equity market softness remain potent forces. Market participants should monitor the RBI’s subsequent policy actions, global oil price trends, and the evolution of U.S. monetary policy to gauge the rupee’s near‑term path.