Yes that is correct. Forex rates are largely determined by demand and supply although bigger macro factors are also equally involved in the process. Like in any market, the actual market value is determined by the forces of demand and supply. But when trading commences for the day, the traders will use the RBI reference rate as the base. Then the movement will be based on the demand and supply of currency but with macro buy-ins too.

When there is selling in equity markets, it is expected that FIIs will take dollars out of India. That triggers a demand for dollars. Similarly, if the expectation is that the dollar will get stronger then importers and forex borrowers will rush to buy dollars. That will create a demand for dollars and make the USD/INR pair move higher.

This normally happens when the INR is expected to appreciate. For example, the day the India rating was upgraded by Moody’s; there was a sharp increase in supply of dollars from exporters. These exporters preferred to convert their dollars into INR. Typically, this kind of surge in supply results in the dollar weakening and the pair value goes down.