The USD/INR pair opened flat at around 90.20 amidst low trading volumes on the last trading day of 2025. Throughout the year, Foreign Institutional Investors (FIIs) were net sellers for nine months, divesting Rs. 30,752.24 crore, partly due to ongoing trade tensions between the US and India.
Trade relations soured in 2025 as the US increased tariffs on Indian imports to 50%, including a 25% punitive duty on oil imports from Russia. Meanwhile, the US Dollar showed marginal strength in Asian markets, as Federal Reserve officials supported more rate cuts to boost the US job market.
Federal Policy Adjustments
The Federal Open Market Committee’s December minutes suggested a move towards a neutral policy to prevent job market deterioration. This has set expectations for potential monetary easing, influencing future policy directions.
The announcement of the new Federal Reserve Chair by US President Donald Trump is anticipated in January 2026, following the stepping down of Chairman Jerome Powell. The release of FOMC minutes is a key event as it offers insights into the Fed’s interest rate policy, affecting the market’s response depending on its tone.
As we end 2025, the USD/INR pair is steady around 90.20, but this is happening on very low trading volume. We should not trust these quiet holiday markets, as true market direction will become clearer when traders return in January. Historically, the first few weeks of a new year often bring a surge in volatility as new positions are established.
The pressure on the Rupee is significant, with Foreign Institutional Investors (FIIs) pulling out over Rs. 30,752 crore in 2025. This trend of foreign selling has been a consistent theme for nine months and weighs heavily on the Indian currency. We saw a similar, larger-scale outflow from emerging markets back in 2022 when the US Federal Reserve was aggressively hiking rates, which suggests this pressure on the Rupee could continue.
Trade and Currency Challenges
Compounding this issue are the ongoing trade problems with the United States, which have placed a 50% tariff on some Indian goods. This situation hurts India’s export competitiveness and weakens the fundamental outlook for the Rupee. We can look at the US-China trade war from 2018 to 2020, which caused sustained weakness in the Chinese Yuan, as a model for how these disputes can impact a currency.
However, the US Dollar itself faces headwinds from a dovish Federal Reserve that is signaling more interest rate cuts to support jobs. A recent report showed US Nonfarm Payrolls in November 2025 added just 95,000 jobs, well below the 150,000 expected, reinforcing the case for easier monetary policy. This stance typically weakens a currency, creating a difficult two-way pull for the USD/INR pair.
The biggest event on the horizon for us is the January announcement of a new Fed Chair. This introduces major uncertainty, and we expect a spike in currency volatility options pricing leading up to the decision. Any hint that the new Chair could be more or less aggressive on rate policy than Jerome Powell will cause sharp market moves.
Given these conflicting forces, we believe buying USD/INR call options is a prudent strategy for the coming weeks. This approach allows us to profit from any further Rupee weakness caused by outflows or trade issues. At the same time, our risk is limited if a surprisingly dovish Fed Chair is appointed and the US Dollar weakens unexpectedly.
