The Indian rupee strengthened against the US dollar on Friday, with USD/INR falling to about 95.12 after reports that the US and Iran will sign a Memorandum of Understanding in Geneva on Sunday, a development that coincided with lower oil prices. During India’s afternoon session, the MCX Crude Oil contract expiring 18 June was down 3.8% at roughly 8,020, its weakest in more than seven weeks, easing pressure on oil-importing economies. A Bloomberg report said the two countries are moving towards an agreement to reopen the Strait of Hormuz ahead of a Group of Seven meeting next week, and Indian equities rose, with the Nifty 50 closing up 2% at around 23,623. Bloomberg also reported India is bracing for a wider-than-expected fiscal gap, with officials prepared to let the deficit expand by up to 0.5% to 4.8% of GDP versus a 4.3% target set in February, though there has been no official confirmation. Inflation picked up, as May CPI printed at 3.93% YoY against 3.48% in April, below the 4% estimate. Foreign Institutional Investors were net sellers on every trading day in June, offloading Rs 64,641.43 crore. Technically, spot held below the 20-day EMA at 95.41; resistance sits near 95.96, RSI is around 47, while support is seen at 94.79 and then 94.03.

Outlook for Oil, Rupee, and FIIs

Given the sharp drop in oil prices from the potential US-Iran deal, we see a clear path for the Indian Rupee to strengthen further in the coming weeks. The MCX Crude Oil contract expiring June 18 has already fallen significantly, and we expect this trend to continue as the market prices in the reopening of the Strait of Hormuz. We should consider shorting crude oil futures to capitalize on this bearish momentum. For the currency market, this is a major tailwind for the Rupee. We are establishing short positions in USD/INR futures, targeting the initial support level around 94.79. Buying USD/INR put options is also an attractive strategy to limit risk while participating in the expected appreciation of the Rupee. This view is strengthened by India’s high dependency on energy imports, with recent data showing the country imports over 85% of its crude oil needs. Historically, periods of lower oil prices, such as after the 2015 Iran nuclear deal, have directly led to a stronger Rupee and improved macroeconomic stability. This fundamental reality provides strong support for our currency positions.

Implications for Equities and Monetary Policy

In the equity markets, the Nifty 50’s 2% jump is just the beginning of a potential rally fueled by lower energy costs and a stronger currency. We are going long on Nifty 50 futures and purchasing call options on major beneficiaries like airline, paint, and logistics companies. This positive sentiment should easily overpower concerns about a slightly wider budget deficit. The recent net selling by Foreign Institutional Investors (FIIs) now looks like an inflection point. The improved economic outlook will likely trigger a sharp reversal, and we anticipate a significant inflow of foreign capital back into Indian equities. We have seen FIIs pour billions into the market in a single month on less significant news, and this development is a far more powerful catalyst. With May’s CPI inflation at 3.93%, below the 4% estimate, lower oil prices will give the Reserve Bank of India considerable comfort. The risk of imported inflation has now greatly diminished, putting potential interest rate cuts back on the table for later this year. This further solidifies the bullish case for Indian assets. From a technical standpoint, USD/INR remains capped below its 20-day EMA near 95.41, reinforcing our bearish bias. We will use any attempt to rally towards this level as an opportunity to add to our short positions. A decisive break below the 94.79 support area would open the door for a move toward the May low of 94.03.

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