The Indian rupee weakened against the US dollar on Tuesday as global bond yields continued to climb, lifting USD/INR towards 96.43, its highest level in more than two months. The 10-year US Treasury yield was up 0.24% at about 5.32%, after touching a two-decade high near 5.35% on Monday, a move that has tended to push markets into a risk-off stance. Pressure on the currency has also come from equity outflows, with Foreign Institutional Investors selling Rs. 14,183.36 crore in the first two trading days of October.
US-backed yields have been rising for months, supported by concerns that energy supply shocks linked to the Middle East war could sustain global inflation. The upward drift has persisted even after softer September Nonfarm Payrolls data led markets to pare expectations for near-term Federal Reserve tightening. Attention now turns to the Reserve Bank of India’s policy decision; market commentary has centred on rates being held, alongside projections of 50 bps of hikes over the cycle, with a 75 bps risk. In the charts, USD/INR traded around 96.42 above the 20-day EMA at 95.91, while the 14-day RSI stood at 68.07.
Derivative Trading Strategy And Technical Outlook
We suggest derivative traders maintain a bullish bias on the USD/INR pair in the coming weeks, targeting further upside as the pair hovers near key highs of 96.43. The strong upward momentum is firmly supported by the 20-day Exponential Moving Average at 95.91, making buy-on-dip strategies highly attractive. Traders can utilize long call options or bull call spreads to capture this momentum while limiting downside risk.
The relentless surge in US 10-year Treasury yields, which recently peaked near two-decade highs of 5.35%, continues to fuel a global risk-off environment. This yield spike makes US dollar-backed assets far more appealing, draining capital from emerging markets and pressuring the Indian Rupee. Historically, when US yields sustain above the 5% threshold, emerging market currencies face prolonged depreciation cycles.
Capital Flows, Policy Expectations, And Risk Management
We are seeing massive capital flight from Indian equities, with Foreign Institutional Investors offloading a staggering Rs. 14,183.36 crore in just the first two trading days of October. This heavy institutional selling puts immense pressure on the local currency, creating a structural demand for the US dollar in the spot market. For derivative traders, shorting Indian index futures alongside long USD/INR positions could serve as a highly effective correlation play.
While the Reserve Bank of India is widely expected to keep interest rates steady in the upcoming meeting, a hawkish shift in policy tone is highly anticipated. Market forecasts suggest a potential 50 to 75 basis point rate hike cycle starting as early as December to combat rising inflation. Derivative traders should watch for heightened volatility in interest rate futures and currency options as the market begins pricing in this aggressive tightening path.
Despite the strong uptrend, we caution that the daily Relative Strength Index is currently hovering near overbought territory at 68.07. This indicates that while the upward trend is robust, a short-term technical pullback toward the 95.91 support level remains a distinct possibility. To manage this risk, traders should avoid chasing the market at local tops and instead focus on entry points during minor corrections.
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