Mumbai, June 23, 2025 — The Indian rupee’s slide against the US dollar is edging it closer to a key psychological threshold of ₹87, raising questions about how much volatility the Reserve Bank of India (RBI) is willing to tolerate before stepping in with intervention.

Analysts at Australia & New Zealand Banking Group Ltd. (ANZ) and MUFG Bank Ltd. suggest that any further depreciation toward this level is likely to prompt decisive action from the central bank, which is known for maintaining stability in the foreign exchange market, especially during times of external stress.

Rupee: Asia’s Worst Performer This Quarter

Among major Asian currencies, the Indian rupee is the worst performer in the current quarter, primarily due to two key factors:

1. Escalating geopolitical tensions in the Middle East, particularly between Iran and Israel

2. A sharp uptick in global crude oil prices

India, which imports over 85% of its oil needs, is acutely vulnerable to energy-driven shocks. A rise in oil prices widens the current account deficit, increases the country’s import bill, and fuels inflation, all of which add further downward pressure on the rupee.

Key Support Level: ₹87/USD

According to Dhiraj Nim, a currency strategist at ANZ:

“The 87 level is very much on the cards if the Middle East tensions rise and the crisis becomes a regional one. That would be tantamount to a shock, and the RBI won’t like that.”

He added that the central bank is unlikely to tolerate a breach of that level without responding through foreign exchange intervention, which typically involves dollar selling from reserves to stabilize the rupee.

RBI’s Intervention Strategy

The RBI has a history of stepping in to curb volatility rather than defend any specific exchange rate. However, it is believed to have an implicit tolerance band, and any sustained breach near ₹87/USD would be seen as disruptive to market stability, potentially triggering:

• Dollar selling through public sector banks

• Liquidity adjustments in the interbank market

• Strategic use of forwards and swaps

India's foreign exchange reserves, which stand above $635 billion, give the RBI ample room to act.

Geopolitical Tensions & Energy Dependence

The renewed hostilities in the Middle East, particularly between Israel and Iran, are fanning global market uncertainties. For India, the stakes are higher due to:

• Heavy oil import dependency

• Potential disruptions in shipping lanes like the Strait of Hormuz

• Risk of capital outflows from emerging markets toward safe havens like the US dollar

These risks compound existing macroeconomic vulnerabilities such as a widening fiscal deficit, sticky core inflation, and tepid exports.

Rupee Outlook: What Comes Next?

Should the rupee breach the ₹87/$ mark, market participants anticipate:

• RBI intervention to stabilize the currency and limit imported inflation

• Possible policy signaling in monetary updates to maintain investor confidence

• Heightened volatility in equities and bond yields due to foreign fund rebalancing

Investor Implications

Currency-sensitive sectors like oil & gas, aviation, and auto (especially with imported components) may come under pressure. Importers might look to hedge aggressively, while exporters could benefit, albeit temporarily, from a weaker rupee.

Traders are also watching global central bank cues, especially the US Federal Reserve, for any potential interest rate changes that may influence capital flows further.

Conclusion

With the rupee inching closer to the 87/USD level, all eyes are now on the RBI’s tolerance threshold and intervention strategy. In the backdrop of surging crude prices, geopolitical risk, and macroeconomic pressures, the coming days could see heightened market scrutiny on the currency’s movement and central bank actions.

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