India’s February flash PMIs showed continued expansion in both services and manufacturing, supported by domestic and external demand, with hiring and business confidence also rising. Service activity was linked to stronger external demand, while manufacturing gains were tied to stronger domestic demand after GST changes.
External demand for manufacturers is expected to improve if a US trade deal lowers tariffs to 18% from 50%. The labour-intensive manufacturing sector is expected to benefit, which may support employment.
Despite the PMI strength, USD/INR rose 0.3% to 90.98 last Friday and increased 0.4% over the week. The INR was the weakest Asian currency year-to-date, attributed to capital outflows and strong US dollar demand from importers.
Year-to-date, the INR was down 1.2% against the US dollar, compared with an average of +0.6% for Asian currencies excluding Japan. The piece was produced with the help of an AI tool and reviewed by an editor.
Last year around this time, we saw a clear disconnect where strong Indian PMI data failed to support the Rupee. Capital outflows and heavy dollar demand from importers were the main factors pushing the USD/INR pair towards 91. The Rupee was then the weakest performing currency in Asia, even as the economy showed fundamental strength.
The narrative has since changed, as the anticipated drivers for growth have materialized. Foreign portfolio investors have turned into net buyers of Indian equities, bringing in over $5 billion in the last quarter, which reverses the outflow trend we saw in early 2025. This confidence is supported by a manufacturing sector that continues to expand, with the latest PMI reading for January coming in at a robust 57.5.
This sustained fundamental strength suggests that selling out-of-the-money USD/INR call options is a prudent strategy to collect premium. With the spot rate now hovering near 88.50, the market sentiment has turned positive for the Rupee, causing implied volatility to decrease. This environment makes it more attractive to establish positions that benefit from either a stable or gradually strengthening local currency.
However, we must remain watchful of the persistent dollar demand from commodity importers, which provides a floor for the pair. With Brent crude prices stabilizing around $85 per barrel, the pressure from the import bill is a constant factor that can slow the Rupee’s appreciation. This underlying demand prevents the USD/INR from falling too quickly.
Therefore, traders could consider strategies like ratio spreads or buying short-dated USD/INR put options to capitalize on a gradual downward move. These positions allow for profit from the expected trend while managing the risk of sharp, importer-driven dollar buying. Monitoring the Reserve Bank of India’s activity remains critical, as it can influence short-term currency movements.
