Most currency strategists expect India's rupee to give back its recent gains and weaken to 96 per U.S. dollar by the end of January, a Reuters poll published Wednesday showed, even though the Reserve Bank of India's curbs on currency bets have pushed companies' dollar hedging to an eight-month low.

The rupee itself touched a two-week high in early trading as the dollar slid after the U.S. midterm elections, then closed at 94.64 per dollar, up from 94.74 on Tuesday, Reuters reported. For investors in Asia, the gap between a firmer spot rate and a gloomier outlook matters: the RBI's tools have calmed the market but made it costlier for foreign funds to hedge Indian assets, which could slow the inflows the currency needs.

Rupee Gains as the Dollar Index Falls After the U.S. Midterms

The dollar index, which tracks the greenback against six major currencies, was down 0.4% at 101.3 on Wednesday, with the euro, sterling and Swiss franc leading gains, according to Reuters. Investors were assessing the impact of the U.S. midterm election results, the agency said.

The rupee could not hold its early gains. Importers and banks stepped up dollar purchases around 94.50, Reuters said, and a trader at a state-run bank told the agency that dips in the dollar-rupee rate "have very limited staying power at these levels." The rupee had opened at 94.61 in interbank trading, PTI reported, helped by lower crude prices and foreign institutional investors, who bought a net INR 68.37 billion of Indian shares on Tuesday, their third straight day of buying.

Other Asian currencies did less. South Korea's won was quoted at 1,341.5 per dollar at 3:30 p.m. in Seoul, down 0.5 won, and foreign investors sold a net 2.5 trillion won of local shares, Yonhap reported. The Taiwan dollar slipped, with the U.S. dollar rising NT$0.061 to close at NT$32.821 in Taipei, Focus Taiwan said.

Oil remains a key risk for India. The country is the world's third-largest energy importer, Reuters noted, and strategists in its poll doubt that expensive crude and record foreign selling will stop weighing on the rupee soon, even with a softer dollar and RBI support.

How the RBI's 20% Reserve Cut Dollar Hedging

Forward dollar purchases by Indian companies, mostly importers hedging against a weaker rupee, fell 35% in October from September's record to $49.5 billion, the lowest since February, Bloomberg reported, citing clearinghouse data.

The drop followed RBI measures last month, including an Oct. 10 circular that requires banks to hold a Foreign Exchange Risk Reserve equal to 20% of the rupee value of each currency derivative contract above $2 million in which a client buys foreign currency to hedge current-account payments. The reserve sits in cash at the central bank until the contract ends, and splitting trades to stay under the threshold counts as a violation. The measures have also drained cash from Indian banks.

Forward dollar positions now cost more to build, and the rupee has risen about 2% since the steps, according to Bloomberg. Madhavi Arora, chief economist at Emkay Global Financial Services, described them as "tactical fixes rather than structural solutions."

There are side effects. Exporters, unsure of the outlook, cut forward dollar sales to $32.2 billion in October, the lowest since May. The cost of insuring against rupee weakness reached multi-year highs last month and remains elevated, which can erode the yield advantage of Indian bonds for fully hedged buyers, Norbert Ling of Invesco Hong Kong said, according to Bloomberg. Foreign investors sold about $590 million of index-eligible Indian bonds in October, a second straight month of outflows.

Underlying demand remains high: importers' average monthly dollar purchases have risen about 40% this year to $62 billion, the data showed.

Why Strategists Still See the Rupee at 96

The median forecast of 37 strategists polled by Reuters from Nov. 2 to 4 puts the rupee at 96.00 per dollar at end-January and 96.33 at end-April. The currency is down about 5% this year and hit a record low of 96.96 in May. BofA, the most bearish forecaster, has called for 99 within 12 months since at least August, and Morgan Stanley expects a record low in early 2027. No one in the poll expects the rupee to breach 100.

Upasana Chachra, Morgan Stanley's chief India economist, told Reuters she does not see foreign equity or capital flows changing meaningfully in the near term. The RBI's defense of the rupee has also used up buffers: foreign exchange reserves have fallen to $719.75 billion, while the RBI's forward dollar liabilities have climbed to a record $239.2 billion, Reuters reported. Anil Bhansali of Finrex Treasury Advisors said it is clear the central bank wants the rupee around 95. The RBI says it does not target a level and steps in only to curb excessive volatility.

Natixis, in a note cited by Reuters, said heavy intervention, market restrictions, rate increases and about $143 billion raised through a deposit and borrowing scheme had prevented a disorderly fall, but that no central bank can create export capacity or energy independence. Strategists in the same poll broadly expect the dollar to weaken in coming months, though they said it would likely prove more resilient than forecast.

For now, traders said, importers and banks have been quick to buy dollars whenever the rupee firms toward 94.50, a sign that the gains may be hard to extend.