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The Reserve Bank of India (RBI) is expected to intervene to contain sharp volatility in the currency market after the rupee slipped below the 88 mark against the US dollar. According to a CareEdge Ratings report, the central bank’s healthy reserves and favourable global trends provide it with room to act if required.

CareEdge has maintained its FY26-end forecast for the rupee at 85–87 to the dollar, supported by a softer greenback, a firmer yuan, India's manageable current account deficit, and the potential of a US–India trade deal. The agency highlighted that India's foreign exchange reserves, at around USD 703 billion, remain close to record highs, giving the RBI ample capacity to smoothen currency fluctuations.

The rupee faces short-term pressure from sustained foreign portfolio investor (FPI) selling, higher H-1B visa fees and lingering concerns about US tariffs. CareEdge noted that fears of tariffs as high as 50 per cent remaining in force could slow India's GDP growth to nearly 6 per cent in FY26.

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Gross foreign direct investment (FDI) inflows touched USD 25.2 billion in the first quarter of FY26. However, net FDI fell to USD 4.9 billion, largely due to Indian firms stepping up overseas investments.

The dollar index has weakened by about 10 per cent so far this year on the back of US trade policy uncertainty, fiscal concerns, and expectations of further rate cuts by the Federal Reserve after its September reduction. Meanwhile, the Chinese yuan has appreciated 2.5 per cent year-to-date, easing competitive pressures on the rupee that were visible during the 2018–19 trade war.

CareEdge said it does not expect the RBI to cut rates in the October Monetary Policy Committee meeting. However, if higher US tariffs persist and growth slows, coupled with a possible fall in inflation following GST rationalisation, the RBI could consider a 25-basis-point cut later in FY26. The report added that since the US Fed is likely to ease policy faster than the RBI, the interest rate differential may widen in favour of the rupee, offering some support to the currency.

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