At the brink of 90 to a dollar, rupee takes a step back. Where does it go from here?

The Indian rupee came within kissing distance of 90 to a dollar on Tuesday before likely central bank intervention rescued it from the brink, but not before it touched a new all-time low.

The currency fell for the fifth straight day on steep demand from importers and foreign portfolio investors, shedding 42 paise to close at a record low of 89.87 against the dollar. During the day, the rupee fell further to 89.9475; however, as it neared 90 to a dollar, state-owned banks stepped in to sell dollars and capped its fall, traders said, likely on behalf of the Reserve Bank of India (RBI).

Market participants believe the next phase of the currency’s trajectory will be determined by a complex mix of global carry trade, India’s external balance and the central bank's approach to defending the rupee. Experts believe the rupee will move in a range of 89.70 to 90.00 against the dollar on Wednesday, as the market keeps eyes peeled for the central bank to step in.

“With the traditional suppliers of global carry-trade capital—primarily the US and Japan—now grappling with elevated interest rates, the flow of low-cost capital into emerging markets has weakened noticeably," Rama Chandra Reddy, treasury deputy general manager at Karur Vysya Bank said. This environment not only limits fresh carry-trade inflows into India but also raises the risk of unwinding existing positions, adding incremental pressure on the rupee, he said. In carry trade, investors borrow money in a currency with a low interest rate to buy a currency with a higher interest rate, aiming to profit from the difference.

In the offshore non-deliverable forwards (NDF) market, the rupee briefly breached the 90-per-dollar mark, even as the spot market hovered just below that threshold. The forwards market, where participants lock in a future exchange rate, is often an early signal of stress or confidence in a currency. When forwards price the rupee materially weaker than spot, it indicates that global investors are hedging for further depreciation.

“In the NDF market, we have seen a lot of shorting of the rupee happening, which is creating pressure on the rupee. Even if you don’t account for speculative activities, from a demand-supply basis, the demand for dollars is higher as compared to the supply,” Ritesh Bhansali, deputy chief executive officer at Mecklai Financial Services said. While exporters are not hedging aggressively, importers are trying to frontload their import payments because of the rupee depreciation, he said.

“Domestic fundamentals are creating their own headwinds, a widening current account deficit and a softening balance of payments (BoP) position are contributing to an unfavourable demand–supply dynamic for the currency,” Reddy said.

Foreign portfolio inflows have slowed dramatically and external commercial borrowings weakened, reflecting tighter global financial conditions. At the same time, the current account deficit widened to $12.3 billion, or 1.3% of GDP, driven by a ballooning trade deficit that rose to 9% of GDP, partly due to a surge in gold imports amid higher global prices.

Exports to the US, India’s biggest market, continued to weaken due to the 50% bilateral tariffs, intensifying downward pressure on the currency.

What next?

The consensus remains that the RBI will defend the 90-level in the near term. However, the market expects the rupee to trade in the 91-92 range in the medium term, until a breakthrough in the India-US trade deal, and a revival in foreign inflows in the fourth quarter. Without such a breakthrough, the rupee may even fall to 94-95 levels, Bhansali of Mecklai Financial Services said.

“Now, we are expecting the RBI to defend around 90 or 90.5 levels. Currently, the sentiment is not in favour of the rupee. Till the time the trade deal is not out, I would not even rule out 91,” Bhansali said.

Once a trade deal is announced, traders expect one-way short-term appreciation in the rupee around 88.00-88.50 levels.

According to a 2 December report by IDFC First Bank Economic Research, even if a deal is struck, the full-year FY26 BoP may remain negative, given that capital flows remain tepid and trade deficits remains elevated.

“A potential breakthrough on the India-US trade deal could act as a sentiment booster and attract growth-seeking capital flows in Q4, offering some respite. Until such tailwinds emerge, the RBI is likely to remain the primary stabilising force, providing crucial support to anchor rupee volatility,” Reddy said.

Many treasury desks believe the central bank will defend the 90-per-dollar level in the December quarter, though this depends heavily on whether the monetary policy committee decides to cut the repo rate this week.

“In case a trade deal is announced, we could see near-term relief with downward movement in USD-INR. However, we expect the depreciation trend to continue, albeit at a more moderate pace. In case a trade deal is not announced, then the pace of depreciation is likely to be faster,” Gaura Sengupta, chief economist at IDFC First Bank said.