USD/INR was little changed near 96.57 last Friday but still rose 0.3% over the week, extending a gradual move higher since early July that has tracked renewed upward pressure from oil prices. A subsequent pullback in oil has eased some pressure on INR. July flash PMIs pointed to a deeper moderation in activity as domestic demand softened and cost pressures returned; manufacturing held up better on stronger external demand as firms built inventory buffers, while services faced weaker demand and tougher competition. Renewed Middle East tensions were cited as a downside risk via higher energy costs and supply-chain disruptions, alongside firmer price pressures that could complicate the RBI’s wait-and-see stance.
On trade policy, the US imposed a new 10% tariff on imports from India that took effect on 24 July, replacing the temporary 10% levy under Section 122 that expired the same day. India’s Commerce Ministry said 45% of goods, including electronics and pharmaceutical products, would be exempt, while talks on a bilateral agreement continue. Meanwhile, banks reported USD20.7bn in FCNR(B) deposits plus ECB and OFCB funding as of 17 July, and the RBI measures are estimated to draw up to USD80bn by year-end; the FCNR(B) facility closes on 30 September, while the ECB and OFCB schemes run until 31 December.
Volatility Risks And Hedging Strategies
We believe derivative traders should prepare for a period of high volatility in the USD/INR pair, which is currently hovering around 96.57. While recent oil price pullbacks—with Brent crude slipping from its recent peak of over $85 per barrel down to around $79—offer relief to the Rupee, geopolitical risks in the Middle East remain high. Traders should use short-term USD/INR call options to hedge against any sudden energy-driven spikes.
Rupee Outlook And Positioning Recommendations
We recommend positioning for a stronger Rupee in the medium term due to the massive capital inflows triggered by the Reserve Bank of India’s deposit schemes. With $20.7 billion already secured as of mid-July, these measures are on track to attract up to $80 billion before the FCNR(B) facility closes on September 30. Historical precedents, such as the 2013 FCNR drive that gathered $34 billion, show that these structural inflows typically provide strong, lasting support to the currency.
The newly enforced 10% US tariff on Indian goods, which took effect on July 24, could put short-term pressure on India’s export revenues and weaken the Rupee. However, because 45% of key goods like pharmaceuticals and electronics are exempt, the actual economic damage will likely be contained. To capitalize on this mixed outlook, we favor writing USD/INR put options at strike prices around 95.50 to collect premium while the massive RBI inflows cushion the Rupee from deeper losses.
