Rupee at record low ahead of RBI policy: How will the MPC decision impact Indian currency?

The rupee (INR) dropped to a new low of 90.25 against the US dollar during Wednesday's intra-day session, falling by 29 paise from its previous close, influenced by foreign institutional investor outflows and ongoing dollar purchases by banks.

Swapnil Aggarwal, Director at VSRK Capital, explained that the US dollar has been gaining strength primarily due to elevated interest rates in the US, which has caused investors to favour dollar-denominated assets. Concurrently, domestic factors have intensified the situation as oil firms and importers ramped up their purchases of dollars, further influencing the rupee's movement.

Collectively, these elements have resulted in a supply-demand disparity in the foreign exchange market, creating downward pressure on the local currency.

On Tuesday, the rupee experienced a eventful day. Following a period of consistent pressure, the currency fell to a new all-time low of 89.95, ultimately closing at 89.87. This decline was not unexpected; it has been gradually accumulating as the India–US trade agreement faced delays and foreign investments dwindled. The rupee began the week on a note of caution but later reached a historic high just shy of the 89.80 level, even with India's impressive economic results.

How will RBI Policy impact Rupee?

Analysts consider December to be a pivotal month for the rupee, with two significant events looming: the Reserve Bank of India's Monetary Policy Committee (MPC) meeting that begins today, Wednesday, December 3, and the interest rate decision set to be revealed on Friday, December 5, ahead of the US Federal Reserve's interest rate outcome on December 10.

RBI’s monetary policy is an important driver of the rupee, though its actual impact depends on the broader macro and global backdrop.

Rahul Kalantri, VP Commodities, Mehta Equities Ltd explained that a rate cut reduces domestic interest rates, boosts liquidity, and encourages credit growth — but it also lowers the yield advantage of Indian assets, typically adding depreciation pressure on the rupee, particularly during periods of strong global dollar demand or weak foreign inflows.

On the other hand, Kalantri believes that maintaining or raising rates reflects a tighter stance, which tends to stabilise or strengthen the rupee by keeping India’s interest-rate differential attractive.

“USD-INR 29Dec cmp 90.17, support at 89.80-89.45 and resistance at 90.65-91.20,” added Rahul.

Further, analysts suggest that the level of backing, nonetheless, depends on external factors like FII/FDI inflows, crude oil costs, global USD trends, India's current account status, and the intervention strategy of the RBI.

Will INR continue to be in pressure?

Amit Pabari, Managing Director of CR Forex Advisors' Research Team, indicated that the RBI's neutral stance may not significantly impact the markets. However, any indication of a potential rate cut could exert additional pressure on the rupee, particularly as the currency is already in a vulnerable state.

Moreover, Pabari noted that market expectations now place a nearly 89% probability on a rate cut from the US Fed. Generally, a Fed rate cut tends to weaken the dollar, which could provide the rupee with some relief.

Further, Madhavi Arora - Chief Economist, Emkay Global, added that the rupee’s weakening bias will continue, with the policy preference also seemingly having shifted towards a weaker currency to offset the tariff hit.

“USDINR could trade in the 88-91 range till end-FY26, depending on the outcome of the US-India trade/tariff standoff,” said Arora.

What exactly did the RBI do?

According to analysts, for several weeks, the RBI maintained a threshold at 88.80. Whenever the market attempted to breach this level, the central bank intervened to defend it. However, on 21 November, that defense began to weaken. Once 88.80 was permitted to fall, it became evident that the RBI is no longer intervening at every turn — instead, it is managing the rupee's value through a deliberate, steady depreciation and intervening only to avoid drastic fluctuations.

“With the currency now hovering at the 90 mark, the key question is: Will the RBI defend this zone more firmly, or stick to its slow-and-steady approach? The coming sessions will reveal the answer,” said Amit Pabari.

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