Equity Outflows and the Rupee
The Indian Rupee found support as India reduced EU car import tariffs to 40% from 110%, improving market sentiment. Despite an initial weakening due to accelerated equity outflows and importer hedging, the potential India-EU trade deal may bolster exports in pharma, textiles, and chemicals, offering a counterbalancing factor for the Rupee.
The USD/INR pair held near its peak of 91.96, last achieved on January 23. India agreed to reduce duties on certain vehicles priced above EUR 15,000, benefiting automakers. However, INR may remain pressured against USD, as traders are cautious ahead of the Federal Reserve’s decisions. The US Dollar weakened by 0.03% against INR as per the given currency percentage changes.
Equity outflows weighed on the Rupee, yet a potential free trade agreement with the EU could mitigate risks. Support may also come from positive US and Asian market sentiment, following comments about potential tariff rollbacks. The Reserve Bank of India’s liquidity infusion is expected to stabilise funding conditions.
The US Dollar Index remained weak amid political uncertainty and potential government shutdown risks, with the Senate facing a January 30 deadline. Economic indicators like GDP growth and jobless claims were stronger than expected, though inflationary pressures persisted. Fed officials signalled cautiousness in easing policy, impacting USD momentum.
USD/INR’s technical analysis reveals a bullish trend within an ascending channel pattern, with the pair trading at around 91.80. Immediate resistance lies at the all-time high of 91.96, with support from the nine-day EMA at 91.28. The Indian economy’s growth, foreign investment, and reliance on oil imports influence the Rupee, with inflation and seasonal USD demand also playing roles.
Impact of India EU Free Trade Agreement
Lastly, India’s consistent growth rate of 6.13% since 2006 has attracted foreign investment, impacting demand for the Rupee. Oil prices, mostly traded in USD, directly affect the Rupee as high oil prices increase USD demand. Inflation above RBI’s 4% target could strengthen INR by prompting rate hikes, while seasonal USD demand fluctuations can weaken the Rupee during high import periods.
With USD/INR trading near its all-time high of 91.96, the recent news of India cutting EU car import tariffs introduces significant two-way risk. This tension between a strong uptrend and positive local news suggests a potential spike in volatility. Derivative traders should be prepared for sharp movements, particularly around the Federal Reserve’s policy decision this Wednesday.
The potential for a broader India-EU free trade agreement should not be underestimated, as it could provide a strong tailwind for the Rupee. We know from past data that EU-India trade in goods exceeded €115 billion back in 2023, so a new deal would likely attract significant foreign investment and boost key export sectors. This suggests that selling out-of-the-money USD/INR call options could be a prudent strategy to capitalize on a potential failure to hold gains above the 92.00 level.
However, we must respect the underlying bullish trend, which is supported by strong US economic data. The recent US GDP growth of 4.4% and sticky core inflation at 2.8% may force the Federal Reserve to maintain a hawkish stance, delaying expected rate cuts. This continued interest rate advantage for the US dollar could easily overwhelm local sentiment and push the pair higher.
We should also factor in the Reserve Bank of India’s capacity to intervene to smooth out volatility. Looking back, India’s foreign exchange reserves were consistently robust, often holding above $620 billion throughout 2024 and 2025. This gives the central bank a substantial toolkit to defend the Rupee against any speculative attacks and prevent a disorderly slide.
On the other side of the equation, the US Dollar is facing its own challenges from rising political uncertainty, including the risk of a partial government shutdown by the January 30 deadline. Past shutdowns have had a tangible economic impact, creating risk-off sentiment that could temporarily weaken the dollar. This presents a near-term downside risk for the USD/INR pair, even if the broader trend is up.
From a technical standpoint, the Relative Strength Index (RSI) is in overbought territory at 78, signaling the recent rally may be overextended and due for a correction. This could see the pair pull back towards the 91.28 support level. Given these conflicting signals, traders might consider strategies that profit from a large price move in either direction, such as long straddles, to navigate the upcoming event risk.
