Strong foreign capital inflows, a weaker US dollar, and timely intervention by the Reserve Bank of India (RBI) helped limit the depreciation of the Indian rupee in July, even as global crude oil prices surged by more than 20 per cent amid escalating geopolitical tensions in West Asia, according to a research report released by Bank of Baroda (BoB).
The report highlighted that despite significant external pressures, the rupee declined by only 0.8 per cent during July, reflecting the resilience of India's external sector and the effectiveness of policy measures undertaken by the central bank to stabilise the domestic currency.
"INR traded cautiously in Jul'26 amidst an escalation in geo-political conflict. It depreciated by only 0.8 per cent in the month even as oil prices increased by over 20 per cent during the same period," the report stated.
According to Bank of Baroda, one of the key factors supporting the rupee was the sharp increase in foreign capital inflows. Foreign Portfolio Investment (FPI) inflows reached their highest level in 22 months, largely driven by strong investments in the equity market. The report noted that investor confidence in India's economic fundamentals remained robust despite heightened global uncertainty.
In addition, the report said the RBI's special measures to encourage foreign currency inflows attracted approximately USD 40.8 billion, providing additional support to the country's foreign exchange position. These measures, combined with active intervention in the foreign exchange market, helped reduce excessive volatility in the rupee.
Bank of Baroda also referred to market reports indicating that the RBI stepped up its presence in the currency market during July by selling dollars from its reserves to moderate sharp fluctuations in the exchange rate. Such interventions are aimed at ensuring orderly market conditions rather than defending any specific exchange rate.
Another important factor supporting the rupee was the weakness in the US dollar. The report pointed out that the US Dollar Index (DXY) declined by 1.3 per cent during July, easing pressure on emerging market currencies, including the Indian rupee.
While rising crude oil prices typically exert downward pressure on the rupee by increasing India's import bill, the report said this impact was partially offset by sustained foreign investment inflows. Net FPI inflows reached around USD 4.2 billion during the month, with equities accounting for the bulk of the investments. Debt inflows also improved, reflecting growing confidence among global investors in India's macroeconomic outlook.
The report further observed that India's external sector remains in a relatively comfortable position despite a widening merchandise trade deficit. It attributed this resilience to several favourable factors, including strong remittance inflows from overseas Indians, a healthy surplus in the services sector, and comfortable levels of foreign exchange reserves.
According to the report, India's foreign exchange reserves stood at USD 682.4 billion as of July 24, providing an import cover of nearly 10 months. Economists generally consider such reserve levels adequate to protect the economy against external shocks, capital outflows, and currency volatility.
The report also noted that India's diversified sources of foreign exchange earnings—including information technology services, business process outsourcing, tourism, and remittances—continue to strengthen the country's balance of payments and reduce vulnerability to fluctuations in global commodity prices.
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Looking ahead, Bank of Baroda cautioned that geopolitical tensions in West Asia remain a significant risk for global financial markets. Any further escalation in the conflict could keep crude oil prices elevated, increasing pressure on oil-importing economies such as India and contributing to continued volatility in currency markets.
However, the report expressed confidence that strong capital inflows, healthy foreign exchange reserves, and proactive policy measures by the RBI would continue to provide a cushion against excessive depreciation in the rupee. "Overall, we expect INR to trade in the range of 95.25-95.75 per US dollar in the near term," the report said.
The report concluded that while global uncertainties are likely to persist, India's relatively strong macroeconomic fundamentals, improving investment flows, and prudent monetary management place the economy in a better position than many other emerging markets to navigate external challenges. Continued vigilance by policymakers, coupled with stable capital inflows, is expected to remain crucial in maintaining currency stability in the months ahead.
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