The Indian Rupee initially weakened against the US Dollar after the US launched strikes on Iranian nuclear sites, pushing USD/INR close to 87.00. However, it reversed as mixed US PMI data and dovish comments from Fed Bowman tempered Dollar demand.

The USD/INR pair stabilised in the European session but saw the Rupee strengthen during the American session. The shift was aided by robust domestic PMI figures and falling crude oil prices, which helped pull the pair away from the 87.00 level. Now trading around 86.54, the Rupee’s outlook remains cautious amid ongoing geopolitical tensions.

Impact of Geopolitical Tensions

Geopolitical tensions have shaken global markets, with heightened concerns over potential retaliatory actions in the Middle East. Crude oil prices surged due to fears over the Strait of Hormuz but cooled down as immediate supply disruptions were reassessed. This volatility puts pressure on the Rupee given India’s heavy reliance on imported oil.

India’s economic dependency on imported crude poses risks if oil prices spike, potentially affecting the trade deficit and inflation. The Reserve Bank of India may intervene to prevent the Rupee from nearing 87.00 against the Dollar. Yet, positive domestic economic signals, like strong PMI data, offer some stability amidst global uncertainties.

With the USD/INR pair hovering around 86.54, the recent behaviour of the Indian Rupee reflects a tug-of-war between global signals and homegrown resilience. The earlier flirtation with 87.00 was driven in part by an external escalation—airstrikes by the United States targeting key Iranian sites, which stirred fears of drawn-out geopolitical repercussions. Initially, this sent the Rupee lower, as energy-importing economies such as India brace for costlier oil and the knock-on effects on their current accounts.

Yet, the subsequent retreat of the Dollar coincided with somewhat underwhelming US PMI data, coupled with a softer stance from Bowman of the Federal Reserve. This rekindled demand for riskier assets and prevented further Dollar strength for now. We interpret this as a slight shift in market tone, where US economic softness, though not extreme, questions the timing and magnitude of any further tightening by the Fed. Bowman’s remarks, although not a formal commitment, hinted that the central bank may be more inclined to hold rates than raise them, if inflation tracks sideways.

Domestic Economic Indicators

Domestically, India continued to produce encouraging signals. Stronger PMI figures indicated that business activity across both manufacturing and services remains sturdy, suggesting continued sector-wide demand. At the same time, a sharp pullback in crude oil prices—after initial panic over supply routes—helped soothe concerns about imported inflation. For a country that imports over 80% of its oil needs, the price of Brent or WTI directly affects the trade balance and purchasing power of its currency. When global oil benchmarks eased, so did pressure on the Rupee.

Even so, the room for sustained appreciation seems narrow in the near term. Geopolitical developments in the Middle East retain the capacity to shift sentiment abruptly. The Strait of Hormuz remains a sensitive flashpoint, and any hiccup in tanker movement could reignite market jitters. While India may not be directly involved, it remains vulnerable to oil-disruption scenarios.

What this means for us is a tighter focus on two simultaneous developments—international energy prices and monetary direction in the US. Should oil resume its climb, the Rupee would again face softening pressures. That could prompt the Reserve Bank of India to subtly step in, reinforcing the lower band near the 87.00 mark through forex operations or liquidity management. While not officially declared, these stabilising efforts have surfaced before during episodes of abrupt depreciation.

Bond yields from the US also deserve a watchful eye. While real yields are moderating slightly, they remain elevated enough to attract foreign interest, which could divert capital flows out of Indian assets. That backdrop keeps pressure on the Rupee, although any reversal in yield trends due to cracks in US macroeconomic data would cushion the currency to some degree.

Essentially, market participants should remain adaptable, interpreting each new data point—be it a PMI release or a shift in energy benchmarks—as weighted inputs. The path forward isn’t one of strong linear movements, but rather, incremental adjustments within a framework still shaped by broader themes: global fuel anxiety, recalibrating central banks, and a locally upbeat business cycle.

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