The Indian Rupee has decreased to around 87.90 against the US Dollar late Tuesday. This occurs as India’s Consumer Price Index (CPI) shows a cool-down, with July’s retail inflation at 1.55%, below forecasts and its lowest since June 2017.
Falling inflation pressures may lead to further interest rate cuts, as the Reserve Bank of India has already reduced the Repo Rate by 100 basis points to 5.5% this year. The RBI’s recent monetary policy meeting saw CPI projections for the current Financial Year adjusted to 3.1% from a previous 3.7%.
Trade Tensions And Market Outlook
Trade tensions between India and the US add uncertainty to the Indian Rupee’s outlook. Talks are planned for August 25 in New Delhi, amid US-imposed tariffs affecting trade dynamics. Meanwhile, Foreign Institutional Investors sold Rs. 1,202.65 crores worth of shares on Monday.
The US Dollar Index stands firm around 98.50 as US CPI data is awaited, expecting a year-on-year increase of 2.8% and 3.0% for headline and core CPI, respectively. Rising inflationary pressures could affect September’s Federal Reserve interest rate decisions, with a predicted 88% chance of a 25 basis point cut.
The USD/INR pair remains bullish, with technical indicators supporting its upward trend. The 20-day EMA presents support at 87.24, while resistance is anticipated near the August 5 high of 88.25.
Rising Dollar And Emerging Market Pressure
With the Indian Rupee weakening to 87.90 against the dollar, we see a familiar pattern emerging. The recent cool-down in India’s July 2025 retail inflation to 3.5% puts pressure on the Reserve Bank of India. Historically, as we saw back in 2019, such low inflation readings preceded significant interest rate cuts that weakened the Rupee.
Given this backdrop, the RBI may be forced to consider another rate cut in its upcoming monetary policy meeting to stimulate growth. This potential for monetary policy divergence with the United States is a key factor for us. Foreign institutional investors appear to be reacting already, having sold a net of over Rs. 15,000 crores in Indian equities just last month.
On the other side of the trade, the US Dollar Index is holding firm above 105, supported by relatively sticky inflation in the US. This strength is critical, as a strong dollar globally tends to exert extra pressure on emerging market currencies like the Rupee. We recall the sharp Rupee depreciation during the 2022 Federal Reserve hiking cycle, which saw record FII outflows from India of nearly $29 billion.
For the coming weeks, we should consider buying USD/INR call options to capitalize on a potential upward move. A break above the recent high of 88.25 seems plausible, and options with an 88.50 strike for the September 2025 expiry offer a good risk-to-reward profile. This strategy allows us to profit from a rising USD/INR while limiting our downside risk to the premium paid.
The technical outlook supports this bullish view, with the pair trading comfortably above its key moving averages. Implied volatility is likely to rise ahead of the next RBI and Federal Reserve meetings. Therefore, establishing long positions now, before volatility increases the cost of options, would be a prudent move.
