The Indian Rupee has seen a recent decline, reaching a two-month low against the US Dollar, which rose by 0.55% to nearly 91.15. This downturn is linked to Foreign Institutional Investors (FIIs) offloading Rs. 4,781.24 crore from the Indian stock market, amid stalled US-India trade deals.
In January, FIIs were net sellers in nine out of ten days, reducing their holdings by Rs. 21,706.27 crore. Trade dialogue between India and the US showed no financial breakthroughs despite positive remarks from officials. HSBC economists note weak capital inflows as a main challenge for the Indian Rupee.
Inflation Data and Reserve Bank Policies
India’s retail and wholesale inflation data for December indicate price growth pressures. However, the Reserve Bank of India (RBI) may continue reducing interest rates. The Consumer Price Index (CPI) increased by 1.33% year-on-year, still within RBI’s tolerance of 2%-6%.
Despite a short drop in the US Dollar Index, USD gained after Fed officials called for maintaining restrictive interest rates. The CME FedWatch tool predicts no rate changes for January. Comments from President Trump indicate potential new Fed Chair announcements, with key contenders being Economic Adviser Kevin Hassett and Fed Governors Christopher Waller and Michelle Bowman.
USD/INR prices aim for a high near 91.50, with a bullish RSI and persistent price support above the 20-day EMA, though a drop below may signal further declines.
The divergence between US and Indian monetary policy creates a clear trading signal for the coming weeks. The Federal Reserve is signaling a restrictive stance to fight inflation, while the Reserve Bank of India is expected to cut rates. This fundamental pressure points toward continued strength in the USD/INR pair.
Strategies for USD/INR Movements
We are seeing this play out with heavy selling from Foreign Institutional Investors, who have already pulled over Rs. 21,700 crore from Indian equities this month. This is a significant shift, as we recall that for most of the second half of 2025, FIIs were net buyers. The lack of a breakthrough in the US-India trade deal is fueling this exit and is likely to continue weighing on the rupee.
The expectation of an RBI rate cut is well-founded, given that December’s CPI inflation of 1.33% is far below the central bank’s tolerance band. Looking back, we saw a similar low-inflation environment in late 2025, which preceded the RBI’s last rate cut in November. In stark contrast, Fed officials are openly discussing the need to hold rates steady at their current 3.50%-3.75% level.
Given this momentum, we should consider strategies that profit from a rising USD/INR, such as buying call options with strike prices near the 91.50 all-time high. The technical indicators support this view, showing strong upward momentum with the RSI at 64.23, which is not yet in overbought territory. This provides a defined-risk way to participate in the expected move higher.
Implied volatility on USD/INR options has increased to nearly 7%, up from an average of 5.5% in the fourth quarter of 2025, making some options more expensive. Therefore, using bull call spreads could be an effective way to lower the cost of entry while still targeting a move towards the 91.50 resistance level. We must also watch for the announcement of the new Fed Chair, as a particularly hawkish choice could accelerate the dollar’s gains.
