Rupee Shows Stability in H1 FY27 After Sharp Decline in FY26

Following a challenging financial year 2025-26, during which the Indian rupee lost nearly 10 percent of its value against the US dollar, the local currency has shown signs of steadiness in the first six months of the current fiscal year 2027. The rupee depreciated by just 1.1 percent during this period, a notable slowdown in its decline compared to the previous year.

This moderation in the rupee's fall comes after a series of regulatory actions taken by the Reserve Bank of India (RBI) aimed at curbing volatility and attracting foreign capital. These measures followed a sharp 4 percent drop in March, coinciding with the outbreak of conflict in West Asia, which heightened uncertainty in currency markets.

On the debt front, the yield on the benchmark 10-year government bond edged higher by approximately 13 basis points during the same timeframe, reflecting cautious investor sentiment amid global rate movements and inflation concerns.

The rupee closed at 95.83 per dollar on Wednesday, marginally stronger than its previous close of 95.99. Despite this relative stability, it remains one of the weaker Asian currencies this half-year. The Indonesian rupiah, Philippine peso, and Thai baht all experienced larger depreciations of 4.8 percent, 3.1 percent, and 2.7 percent respectively. Other currencies such as the Malaysian ringgit, Bangladesh taka, and Hong Kong dollar showed smaller declines under 1 percent.

When viewed over a longer horizon, the rupee's performance still appears fragile. It has depreciated 6.2 percent in the first nine months of the calendar year 2026 and is down 7.3 percent compared to the same period last year.

One major factor influencing the rupee is the price of crude oil. Brent crude oil prices hovered near $108 per barrel this week amid ongoing uncertainties surrounding the US-Iran conflict. Given that India imports close to 90 percent of its crude oil needs, fluctuations in global oil prices exert significant pressure on the currency.

Foreign investment flows have also played a role in the rupee's movement. September saw net selling by foreign investors in Indian assets, while the US 10-year Treasury yield climbed above 5 percent, supporting a stronger dollar globally.

To manage currency swings, the RBI has actively intervened in the foreign exchange market. State-owned banks have been instructed to sell dollars, particularly when the rupee neared the 96 per dollar mark. The rupee touched this level in July and briefly crossed it again recently before pulling back.

A treasury official at a private bank noted, "The key influences during the six-month period were the RBI’s special interventions and crude oil prices. While the RBI measures helped stabilize government bonds, they had limited impact on the rupee. Geopolitical risks continue to weigh on the currency. With global yields creeping up and talks of RBI rate tightening, bond markets might remain pressured, while the rupee’s trajectory will largely depend on crude oil prices and the central bank’s dollar supply strategy around the 96 level."

In June, the RBI introduced a special dollar-rupee swap facility targeting fresh three- to five-year Foreign Currency Non-Resident (Bank) deposits, along with swap windows for external commercial borrowings and overseas foreign currency borrowings. This initiative allowed banks to sell dollars raised through these deposits to the RBI and repurchase them at maturity at the same rate, lowering hedging costs and enabling higher interest rates for non-resident Indians.

In the government securities market, the 10-year bond yield has hovered near 7.15 percent in recent days, closing at 7.17 percent on Wednesday. Market participants are closely watching the upcoming RBI monetary policy meeting scheduled for October, searching for indications about future interest rate moves.

A senior executive from a primary dealership commented, "Selling pressure on bonds has been driven by expectations of rate hikes, elevated crude oil prices, and rising US yields. A temporary rally was sparked by RBI measures and a brief easing in crude prices, but anticipation of further rate increases dampened momentum."

The RBI’s efforts to attract foreign currency inflows have also bolstered the country’s forex reserves, which rose by roughly $78 billion from $688.06 billion at the end of FY26 to $765.90 billion as of the week ending September 18.

Looking ahead, the rupee’s performance will largely hinge on external factors such as crude oil prices and global interest rates, alongside domestic monetary policy decisions. The RBI’s ongoing interventions aim to maintain orderly market conditions amid a complex and shifting economic environment.