Capital inflows, RBI support limit rupee's decline despite 20% oil price surge in July

The Indian rupee demonstrated remarkable stability in July, largely resisting the impact of a more than 20 percent surge in global crude oil prices, according to a research report from Bank of Baroda (BoB). This resilience is attributed to robust capital inflows and proactive measures undertaken by the Reserve Bank of India (RBI).

Despite escalating geopolitical tensions in West Asia, which typically drive up oil prices and pressure emerging market currencies, the rupee depreciated by a mere 0.8 percent in July. The BoB report highlights several supporting factors: a weaker US dollar, strong foreign capital inflows reaching a 22-month high, and direct intervention by the RBI in the foreign exchange market. The central bank's special measures reportedly attracted USD 40.8 billion in inflows.

The report also noted that a 1.3 percent decline in the US Dollar Index (DXY) during July provided additional support to the rupee. Foreign portfolio investments (FPI) saw significant growth, with USD 4.2 billion flowing into equities alone, while debt inflows also improved. India's external financial position remains strong, bolstered by substantial remittances, a growing services surplus, and healthy foreign exchange reserves, which stood at USD 682.4 billion as of July 24, sufficient to cover approximately 10 months of imports.

Looking ahead, the BoB report anticipates continued volatility in the currency market due to ongoing uncertainty surrounding the conflict in West Asia, which is likely to sustain elevated oil prices. However, the report projects that sustained capital inflows and the RBI's ongoing policy interventions will act as a buffer, limiting further depreciation of the rupee. The near-term trading range for the Indian rupee is forecast to be between 95.25 and 95.75 against the US dollar.

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INR traded cautiously in Jul'26 amidst an escalation in geo-political conflict. It depreciated by only 0.8% in the month even as oil prices increased by over 20% in the month.