The Indian Rupee gained value after nearing 86.90 against the US Dollar during Monday’s European trading session. This follows robust preliminary HSBC PMI data for June, showing the Composite PMI grew to 61.0 from 59.3 in May, driven by strong manufacturing and services sector activity.

Oil prices retreated, reducing early gains and softening the Indian Rupee’s earlier slide. However, rising crude prices due to US involvement in Middle East tensions may keep the Rupee under pressure. The Indian equity market, affected by these tensions, saw Nifty50 drop 1% but later regain half its losses.

Us Strikes On Iranian Sites

The US launched strikes on three Iranian nuclear sites over the weekend. Tehran plans to close the Strait of Hormuz, impacting global oil supply. The Indian Rupee, currently around 86.95, might depreciate towards Rs. 88 against the US Dollar if tensions persist, increasing India’s current account deficit.

Domestically, the Reserve Bank of India cut its Repo Rate by 50 basis points to 5.5%. Meanwhile, in the US, Federal Reserve discussions on interest rate cuts created uncertainty. The USD/INR pair remains bullish, with the 20-day EMA providing support, and the April 11 high serving as a key resistance level.

What we’ve already seen reflected in the early week’s price action is a balancing act between favourable domestic indicators and lingering external headwinds. The momentum in India’s private sector activity suggests internal demand remains firm, particularly with the June composite PMI moving further into expansionary territory. Strong showings from both manufacturing and services reinforce this narrative. From a sentiment perspective, this would normally be expected to inject strength into local assets, including the currency. However, the Rupee’s earlier bounce was reversible, closely tied to energy markets and risk-off flows.

Energy prices continue to cloud the domestic currency’s direction. Initial softening in oil prices supported the Rupee’s recovery from its earlier weakness, but this relief appears fragile. With potential retaliation from Tehran and the announced US military actions targeting Iranian facilities, geopolitical threats have now entwined themselves with commodity expectations. Markets are already gauging the risk of disruptions to the Strait of Hormuz, which could constrain global crude supply just as global demand expectations tick higher in the summer months. For a net oil importer like India, this raises near-term concerns over trade balances and fuel prices trickling through to inflation levels. A broader current account deficit would be an immediate casualty.

Central Bank Policies

There’s additional complexity from central bank policies on either side. Domestically, the move from the RBI to lower the Repo Rate by 50 basis points comes as an unexpected pivot, hinting that policymakers may be front-loading accommodation in anticipation of the external strain. This typically puts downward pressure on the Rupee, improving liquidity but often at the cost of short-term currency value as rate differentials narrow with other economies.

Overseas, the Fed is navigating its own timing dilemma. Markets are reacting not only to recent data but also to diverging statements among Fed officials regarding the pace of rate cuts. That’s led to choppy activity in USD pairs, but the Dollar Index remains reasonably well-supported. This sets up a strong base beneath the USD/INR pair, which persists in its upward slope. The 20-day exponential moving average offers a reliable structure, while the pair eyes a retest of the April 11th resistance seen earlier in the spring.

In the context of this, options dealers and futures participants should be aware of the tilted bias upwards in the pair, especially if crude price projections move stubbornly higher and rate policy in the US sees any shift in dovish expectations. Hedging strategies could favour setups that accommodate moderate Rupee depreciation, particularly if realised volatility in energy-linked assets picks up in coming weeks.

Looking ahead in the near term, the prospect of the pair pushing toward Rs. 88 isn’t speculative—it’s technical and fundamentally supported, especially under prolonged conflict scenarios that stall oil tankers or spike Brent crude above recent averages. Additionally, domestic equities may see increased foreign outflows should risk-off sentiment take hold, further pressuring the local currency. While Nifty50 showed resilience by pulling back half its earlier loss, swings in foreign institutional positioning will remain volatile in this macro backdrop.

From our perspective, the next fortnight calls for increased sensitivity to commodities-linked news events and clear triggers like any escalation in naval activity through the Gulf. Adjustments in options premiums and directional bets may need to be made swiftly following such headlines. Incorporating flexibility in positions, especially near major support and resistance levels already identified on the daily charts, will help mitigate exposure to one-sided setups.

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