Business

Why the rupee moves: a plain guide to exchange rates

The rupee traded near 96.5 to the US dollar in early October 2026, against about 88 a year earlier. Here is how the exchange rate is set, what pushes it, what the RBI does and doesn't do, and what a weaker rupee means for your fuel bill, foreign fees and remittances.

Chander Prakash

By Founder & Editor

8 min read

Illustrative cover: Why the rupee moves: a plain guide to exchange rates
Illustration: Pointales

The rupee’s value against the US dollar is set mainly by the market: banks, importers, exporters and investors buying and selling dollars every working day. The Reserve Bank of India (RBI) steps in to smooth sharp swings but, by its own stated policy, does not defend any particular level. The rupee moves when the demand for dollars in India outruns the supply, or the other way round. In early October 2026 it traded at about 96.4 to 96.9 per dollar, close to its record low and well below the roughly 88 it fetched a year earlier.

This is a general explainer, not financial advice, and it makes no forecast of where the rupee is headed.

How the rupee-dollar rate is set

India moved to a market-determined exchange rate in March 1993, when a brief dual-rate system was unified (RBI). Since then, the rate you see quoted is the price at which banks trade dollars for rupees in the interbank market.

The RBI describes its approach as letting the market set the price while intervening only to curb excessive volatility. Governor Sanjay Malhotra put it plainly in December 2025: “we allow the markets to determine the prices; we don’t target any price levels” (The Week).

That is the official, or de jure, position: a floating rupee. The International Monetary Fund (IMF) also classifies how a currency actually behaves. In its 2025 review of India it described the de facto arrangement as “crawl-like”, meaning the rupee had moved within a narrow band around a trend, because the RBI intervenes frequently (IMF). The IMF stressed that this is a statistical label about the past, not a statement about policy. Economists often call the overall system a managed float.

What moves it: demand and supply for dollars

Think of the rupee’s price as the result of two queues: people in India who need dollars, and people who bring dollars in.

Needs dollars (pushes the rupee down)Brings dollars in (pushes the rupee up)
Importers paying for oil, gold, electronics, machineryExporters of goods and services, such as IT services
Foreign portfolio investors selling Indian shares and bondsForeign portfolio investors buying Indian assets
Indians paying foreign tuition, travel and investments abroadRemittances from Indians working overseas
Companies repaying foreign loansForeign direct investment and new foreign borrowing

Most of the factors in the news are really about one side of this table growing faster than the other.

The trade gap and the current account

India buys far more goods from the world than it sells. In April–June 2026, the merchandise trade deficit was $86.1 billion, up from $68.9 billion a year earlier (RBI). Services exports and remittances fill much of that hole: net services receipts were $51.6 billion and personal transfers, mostly money sent home by Indians abroad, were $42.9 billion. What remains is the current account deficit (CAD), which was $4.2 billion, or 0.5% of GDP, in that quarter. A wider CAD means India needs more foreign money each year to pay its way. For how GDP itself is measured, see how to read India’s GDP numbers.

Crude oil

Oil is the single biggest swing factor. India imports about 85% or more of the crude oil it uses (PRS Legislative Research), and pays for it in dollars. When oil prices rise, refiners need more dollars for the same barrels. Brent crude settled at $104.72 a barrel on 9 October 2026 (Reuters via Yahoo Finance), against about $66 a year earlier (Fortune). The RBI’s October policy statement pointed to the “re-escalation of the conflict in West Asia” and sharp volatility in crude prices (RBI).

Capital flows: FPI and FDI

Foreign money arrives in two broad forms. Foreign portfolio investment (FPI) buys listed shares and bonds and can leave quickly. Foreign direct investment (FDI) builds or buys businesses and tends to stay. In April–June 2026, FPI saw a net outflow of $9.6 billion, against an inflow of $1.6 billion a year earlier, while net FDI was a positive $6.1 billion (RBI). When portfolio investors sell Indian assets and take the money home, they sell rupees and buy dollars.

Interest-rate gaps and the strong dollar

Investors compare what they earn in India with what they can earn elsewhere, after allowing for the risk that the rupee falls. When US interest rates rise, holding dollars becomes more attractive and money tends to flow out of emerging markets. The RBI’s October 2026 resolution noted that the US Federal Reserve had raised rates by 25 basis points in September and that global bond yields were at record highs (RBI). On policy day, the Governor said an appreciating dollar was keeping global market sentiment “nervous and fragile” (Upstox live blog).

This is one reason the rupee can fall even when nothing has changed in India: if the dollar strengthens against most currencies, the rupee usually weakens with them.

What the RBI does, and what it doesn’t

The RBI’s main tool is its foreign exchange reserves: dollars, other currencies, gold and holdings at the IMF. When the rupee falls too fast, it sells dollars to banks, adding supply. When dollars flood in, it can buy them and rebuild reserves. It can do this in the spot market, for immediate delivery, or through forwards and swaps, for future dates.

Reserves move for other reasons too. Their dollar value changes when gold prices and other currencies move. The latest figures show both effects. Reserves hit a record $785.7 billion in the week ended 4 September 2026, then fell for four weeks in a row to $734.6 billion by the week ended 2 October 2026 (RBI Weekly Statistical Supplement). That included an $18.3 billion drop in the week ended 25 September (PTI via Daily Excelsior), which Business Standard reported as the biggest weekly decline on record (Business Standard), and a further $13.0 billion fall the week after. Reserves are still about $51 billion below the early-September peak.

The RBI can also draw dollars in. On 8 June 2026 it opened a special swap facility under which it covered the currency risk on fresh three- to five-year foreign currency deposits from non-resident Indians, known as FCNR(B) deposits. By its count, banks raised $133 billion through these deposits before the window closed on 31 August, plus about $10.6 billion in foreign borrowing under the same facility (RBI). A swap means the RBI takes in dollars now and agrees to exchange them back later, so it buys time rather than permanent reserves.

What the RBI does not do is fix a number. It also uses interest rates to fight inflation, not to set the currency. Its 7 October 2026 decision to raise the repo rate by 25 basis points to 5.50% was framed around inflation (repo rate explained), though higher Indian rates can make rupee assets a little more attractive to foreign investors at the margin. The rupee barely reacted on the day, touching 96.62 in intraday trade (Upstox).

Where the rupee stands now

The rupee closed at 96.71 per dollar on 9 October 2026, after ending at 96.88 the day before (PTI via ThePrint). Its weakest point so far was about 96.96, touched on 20 May 2026 as oil prices surged (Deccan Chronicle). A year earlier, at the end of October 2025, it closed at 88.20 (All India Radio).

What a weaker rupee means for you

A falling rupee is not good or bad in itself. It shifts costs and income between groups.

  • Fuel and transport. Crude is priced in dollars, so the same barrel costs more in rupees. How much reaches the pump depends on oil companies and taxes, but the pressure feeds into the inflation numbers we explain in CPI vs WPI.
  • Imported goods. Phones, laptops, electronic components, gold and many medicines or their ingredients get dearer in rupee terms, often with a lag.
  • Foreign tuition and travel. A fee of $40,000 costs ₹38.7 lakh at 96.7 per dollar, against ₹35.2 lakh at 88 (our calculation, ignoring bank charges). Families paying in instalments feel each move.
  • Exporters. IT firms, textile and engineering exporters earn more rupees for every dollar of sales, which can help their margins, though many also import inputs.
  • NRIs and families receiving remittances. Each dollar sent home buys more rupees.
  • Foreign-currency borrowers. Companies with dollar loans that aren’t hedged see their repayment cost rise in rupees.

Nominal vs real: is the rupee “weak”?

The headline rate, rupees per dollar, is the nominal exchange rate. It tells you nothing about the rupee against the euro, yuan or dirham, or about inflation.

Economists also watch two broader measures. The nominal effective exchange rate (NEER) is a trade-weighted average of the rupee against a basket of currencies. The real effective exchange rate (REER) adjusts that for the difference between Indian inflation and inflation in trading partners. The RBI publishes both for a 40-currency basket, with 2015-16 as the base year set at 100 (RBI). Broadly, a REER above 100 suggests the rupee has become expensive relative to the base year, and below 100 suggests it has become cheaper.

This matters because India’s inflation has usually run higher than in the US. A gradual fall against the dollar can simply offset that gap and leave exporters’ competitiveness unchanged. In May 2026, Governor Malhotra said the rupee had become “undervalued, both in nominal as well as in REER terms” (Deccan Chronicle).

The point: The rupee’s price is set by the demand and supply of dollars, which oil prices, the trade gap, foreign investors and US interest rates push around. The RBI smooths the ride with its reserves and tools like swaps, but doesn’t defend a fixed level. A weaker rupee raises the cost of imports, fuel and foreign fees while helping exporters and remittance receivers.

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Chander Prakash

Chander Prakash Founder & Editor

Chander Prakash is the founder and editor of Pointales. He reviews every story before it is published and sets the publication's editorial standards, with a focus on clear, well-sourced explanations of business and technology.

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