The Rupee found a floor. It will not stay there. Last week, the Indian currency staged a tactical recovery from its historic nadir against the greenback. Do not be fooled by the green on the screen. This is a liquidity trap set by the Reserve Bank of India. Foreign institutional investors are not buying the narrative. They are selling the exit.
The data is grim. The inflows are non-existent. The central bank is fighting a lonely war against mathematical reality. While the Rupee clawed back from 84.82 to 84.18, the structural foundations of the Indian capital account are crumbling. We are witnessing a classic dead cat bounce fueled by intervention rather than investment.
The Foreign Inflow Vacuum
Capital is fleeing. In the first three weeks of February, foreign portfolio investors (FPIs) pulled a staggering $4.2 billion out of Indian equities and debt. This is not a seasonal adjustment. It is a structural pivot. Global asset managers are reallocating toward developed market yields that offer lower risk and comparable real returns. The yield differential has collapsed. With the US 10-year Treasury yield hovering near 4.8 percent, the incentive to hold Indian sovereign debt is evaporating.
The carry trade is dead. Investors who once borrowed in low-interest currencies to buy Indian paper are now facing a squeeze. Hedging costs have spiked. When the cost of a one-year forward contract is added to the equation, the net return on Indian G-Secs is virtually zero. Per recent data from the Reuters Asia Markets desk, the exodus is accelerating in the mid-cap segment where liquidity is drying up.
INR per USD Exchange Rate Volatility (February 2026)
The RBI Expensive Shield
The Reserve Bank of India is burning the furniture to keep the house warm. To prevent a disorderly slide toward the 85.00 mark, the central bank has been active in both the spot and the non-deliverable forwards (NDF) markets. They are selling dollars aggressively. This intervention has a cost. Foreign exchange reserves have depleted by $12 billion in a single month. This is a finite resource.
Market participants report that the RBI is defending the 84.20 level with significant force. This creates a false sense of stability. It encourages importers to delay hedging their exposure. It lures retail investors into thinking the worst is over. In reality, the central bank is merely subsidizing the exit of foreign funds. By keeping the Rupee artificially strong, they allow FPIs to convert their rupee-denominated sales into more dollars than the market would naturally allow.
Comparative Emerging Market Performance
India is not alone, but it is uniquely vulnerable. Unlike other emerging markets that have allowed their currencies to depreciate and find a natural equilibrium, India is fighting the tape. The following table illustrates the performance of the Rupee against its peers during the February volatility window.
| Currency | 7-Day Change vs USD | Market Sentiment | Central Bank Stance |
|---|---|---|---|
| Indian Rupee (INR) | +0.45% | Bearish | Aggressive Intervention |
| Brazilian Real (BRL) | -1.20% | Neutral | Market Determined |
| Turkish Lira (TRY) | -3.40% | Bearish | Passive |
| South African Rand (ZAR) | +0.10% | Neutral | Moderate Intervention |
The Rupee’s outperformance in the short term is an anomaly. It is a divergence from the broader emerging market trend. This divergence is unsustainable. According to the Bloomberg Currency Tracker, the Real Effective Exchange Rate (REER) suggests the Rupee remains overvalued by nearly 4 percent. A correction is not just likely. It is a mathematical necessity.
Energy Headwinds and Trade Deficits
Crude oil is the silent killer of the Rupee. With Brent crude trading at $92 a barrel, India’s import bill is ballooning. The trade deficit is widening at a pace that foreign direct investment (FDI) cannot cover. FDI has slowed to a trickle as global corporations reassess their capital expenditure in high-inflation environments. The Current Account Deficit is projected to hit 3.1 percent of GDP this quarter. This is the danger zone.
When the trade deficit exceeds the net capital inflows, the currency must weaken. There is no other outcome. The RBI can delay this through intervention, but they cannot stop it. The pressure is mounting in the offshore markets where the Rupee is already trading at a discount to the onshore spot rate. This arbitrage opportunity will eventually force the onshore rate to catch up.
Watch the trade balance release scheduled for March 4. If the deficit exceeds $28.5 billion, the psychological barrier of 85.00 will be breached. The market is currently pricing in a 70 percent probability of the Rupee hitting 85.50 by the end of next month. The rebound was a gift to those looking to exit. For everyone else, it is a warning sign. The next leg down will be faster and more violent than the last.
