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After staging its sharpest single-day jump in seven years, the Indian rupee is showing early signs of fatigue. Traders now expect the currency to open weaker, as large importers and corporates step in to buy dollars near a psychologically important level, testing whether the recent surge has real staying power.

The next phase for the rupee, market participants say, will depend less on headlines and more on whether foreign capital flows return in a sustained way.

A Record Rally Meets a Reality Check

The Indian rupee is likely to soften at Wednesday’s open, following a dramatic rally triggered by optimism around a U.S. trade deal. After rising 1.36% on Tuesday its biggest single-session gain in seven years the currency settled at 90.2650 against the U.S. dollar.

Overnight indicators suggest a cautious start. The one-month non-deliverable forward (NDF) market points to an opening range of 90.35 to 90.40 per dollar, reflecting expectations of renewed dollar demand after the rupee’s rapid climb.

For traders, the move from above 92 to near 90 in just a few sessions has been impressive but also unsettling.

The 90-Level: A Line in the Sand

The rally ran into resistance just short of the 90 mark, a level long watched by currency desks and corporate treasurers alike. Bankers said that this zone was always likely to attract heavy dollar buying from importers looking to lock in favorable rates.

That dynamic played out on Tuesday. The rupee touched an intraday high of 90.0450 before retreating, as a major Indian conglomerate and other large corporates were seen purchasing dollars, according to market participants.

“When you see such a sharp move from 92 to 90 in a very short span, it naturally triggers more hedging from importers,” one currency trader said, pointing to the sudden rise in demand for dollar cover.

Why Sustained Gains May Be Hard to Come By

Traders are skeptical that the rupee can push decisively below 90 in the near term. While sentiment has improved, the speed of the recent rally has made importers more active rather than less.

That defensive behavior, market participants argue, could cap further appreciation unless there is a stronger underlying driver.

“I would be surprised if there’s a sustained move below 90 on the dollar-rupee pair,” the trader added, noting that hedging activity is likely to remain elevated at these levels.

In other words, the rupee’s surge may have created its own resistance.

Capital Flows Take Center Stage

Beyond short-term positioning, traders say the real test for the rupee will be capital flows — particularly from overseas investors.

“When you cut through all the noise, the key question is whether capital flows revive,” the trader said. “That’s what will ultimately drive the rupee from here.”

There are early signs of improvement. Foreign portfolio investors, who were largely net sellers in January, turned buyers on Tuesday, purchasing roughly $600 million worth of Indian equities, according to preliminary data.

That reversal has given currency markets some hope that the recent optimism could translate into more durable support.

What the RBI Might Do Next

The possibility of stronger capital inflows has also raised questions about how much appreciation the Reserve Bank of India (RBI) would tolerate.

“If capital flows improve meaningfully in the coming months, driven by trade deals and better offshore investor sentiment, the RBI should allow the rupee to appreciate further,” Deutsche Bank said in a note.

Historically, the central bank has stepped in to smooth volatility rather than defend specific levels. However, a sustained wave of inflows could test that approach, especially if appreciation pressures build quickly.

For now, traders believe the RBI will remain watchful but hands-off, intervening only if moves become disorderly.

Global Cues Offer Little Clarity

Elsewhere in Asia, currency markets provided few clear signals. Regional peers traded mixed, offering little directional guidance for the rupee as local factors took precedence.

Meanwhile, oil prices edged higher after reports that the United States shot down an Iranian drone and that armed boats approached a U.S.-flagged vessel in a key shipping corridor. Higher oil prices are typically a headwind for India, a major crude importer, adding another layer of complexity to the rupee’s outlook.

Geopolitical tensions, traders noted, remain a background risk rather than an immediate driver but one that could quickly reassert itself.

Fed Leadership Adds to Market Chatter

Currency markets are also digesting political developments in the United States. Traders are assessing the potential impact of U.S. President Donald Trump’s nomination of Kevin Warsh to lead the Federal Reserve.

While the move does not change monetary policy overnight, it has introduced fresh uncertainty about the future direction of U.S. rates. For emerging market currencies like the rupee, shifts in Fed expectations can influence capital flows and risk appetite.

So far, the reaction has been measured rather than dramatic.

What Comes Next for the Rupee

The rupee’s recent surge has undoubtedly shifted sentiment. A move of this magnitude tends to reset expectations, even if it does not immediately translate into a new trading range.

In the near term, traders expect the currency to consolidate, with importer demand limiting gains and foreign inflows providing intermittent support. Much will depend on whether overseas investors continue to add to Indian assets and whether global risk conditions remain stable.

For policymakers and markets alike, the coming weeks may offer a clearer answer to a simple but crucial question: was this rally a turning point, or just a sharp correction in a still-fragile trend?

Conclusion

The Indian rupee’s powerful rebound has grabbed attention, but its next move will be shaped less by momentum and more by fundamentals. Corporate dollar demand near key levels and the trajectory of foreign capital flows will determine whether the currency can build on its gains or slip back into familiar territory. For now, the market appears cautiously optimistic but far from convinced.

(With inputs from Reuters)

 

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