Analysts say RBI may insist on buying dollars to build forex reserves Business News & more related News Here

According to some analysts, the rupee’s biggest rally in seven years will give the Reserve Bank of India scope to rebuild its forex reserves, potentially limiting further gains after the boost from the India-US trade deal.

Barclays Bank Plc and Nomura Holdings Inc. are among those predicting the RBI will use the rupee’s improvement to buy dollars. They recommend shorting the rupee – Nomura sees it at 94 per dollar by May, while Barclays is targeting that level through a three-month offshore position.

The rupee was down 0.1% at 90.40 against the dollar on Wednesday, following a 1.4% gain on Tuesday when US tariff cuts helped it recover from Asia’s worst performance last month to become the region’s top gainer. While the RBI has used the dollar to shore up its foreign exchange reserves in the past, Governor Sanjay Malhotra’s strategy is less predictable than his predecessor’s, making the currency’s recovery harder to predict.

“It may not be a completely easy task for the rupee,” said Joey Chew, head of Asia FX research at HSBC Holdings Plc. The RBI’s FX policy could complicate things as it has been “intervening in unexpected ways to prevent unilateral speculation in the rupee over the past few months”.

The central bank has a large negative short forward book of $62.4 billion as of December, which means it will need to repay these dollars. According to Chew, the Indian rupee performed poorly in the second quarter of 2025 as the RBI opened its account of about $25 billion.

The central bank sold huge amounts of dollars in 2025 to support the rupee – a net $49.5 billion by Nomura’s estimate. Still, foreign exchange reserves rose to a record $709 billion, helped by a weaker greenback, a jump in gold prices and the RBI’s forex swaps.

“An important factor to watch will be the level at which the RBI can buy dollars and rebuild its reserves,” said Dheeraj Nim, foreign exchange strategist at Australia and New Zealand Banking Group in Mumbai.

The RBI may eventually rebuild reserves but that seems unlikely at current levels, according to Standard Chartered Plc. HSBC expects the central bank to let the rupee recover in the March quarter before rebuilding reserves.

The central bank has intervened in the market to buy the rupee in recent months as the currency has tested persistent lows. RBI officials have repeatedly said that the exchange rate is determined by the market and the job of the central bank is to ensure orderly activities and curb excess volatility.

Governor Malhotra told a TV channel last month that a 3% annual devaluation in the rupee was certainly worth it given the difference in India’s inflation compared to competitors.

Barclays is advising clients to play down the rupee prudently as it does not expect the current rally to continue and equity outflows to reverse completely. MUFG Bank Ltd is advising clients to create long dollar/rupee positions in the medium term.

Still, a deal would provide near-term relief to the rupee and support the bond market as traders bet on foreign funds returning to local assets. Analysts at Societe Generale believe the currency will strengthen to 87-88 in the coming weeks, while analysts at HSBC expect the currency to reach 88 by the end of March.

The main impact on bonds comes through the FX market and the RBI’s intervention strategy, Nomura strategist Nathan Sribalasundaram wrote in a note. “Short-term inflows provide an opportunity for the RBI to accumulate past reserves and inject liquidity into the rupee.”