Indian Rupee: RBI Smoothing Operations Continue to Influence USD/INR, Says Societe Generale

USD/INR entered the third quarter trading near 94.70 while remaining below its 50-day moving average around 95.02. According to Societe Generale strategists, reported US Dollar sales by Indian state-owned banks and expectations that the Reserve Bank of India (RBI) will continue smoothing operations have contributed to relatively contained movements in the currency pair.

A recent policy change has also attracted attention in India's bond market. The RBI's decision to include ultra-long 40-year and 50-year government bonds in the Fully Accessible Route (FAR) framework has increased their accessibility to foreign investors. During June, yields on the 40-year and 50-year bonds declined by 32 basis points and 27 basis points, respectively, reflecting continued investor demand for longer-duration government securities.

Foreign Portfolio Investors (FPIs) purchased a record INR 418 billion (approximately US$4.4 billion) of Indian Government Bonds through the FAR route in June, surpassing the previous monthly record of INR 239 billion set in August 2024. Societe Generale said tax incentives and broader market access were among the factors supporting the increase in foreign participation.

In the foreign exchange market, USD/INR has remained below its 50-day moving average since mid-June. According to Societe Generale, expectations that the RBI will continue smoothing operations may contribute to relatively stable trading conditions in the near term.

The bank also noted that lower gold prices and softer crude oil prices, factors that are often viewed as supportive for the Indian Rupee, have not yet translated into a stronger currency. Market participants are expected to continue monitoring RBI policy operations, capital flows and commodity prices for further indications of the Rupee's outlook.