The Indian Rupee rose slightly against the US Dollar on Tuesday, with USD/INR easing to near 93.00. Trading was described as range-bound ahead of a US deadline for Iran to reopen the Strait of Hormuz by Tuesday, April 7, 08:00 PM ET (05:30 AM IST on Wednesday).
Over the weekend, Donald Trump said the US would bomb Iranian power plants and bridges if the strait is not reopened by the deadline. Iran issued threats of reciprocal action against regional US infrastructure and allies.
Geopolitical Risk And Oil Impact
Markets focused on the risk that further conflict could lift oil prices, which may weigh on the Rupee. India meets about 88%-89% of its domestic energy needs through oil imports.
Foreign Institutional Investors sold Indian equities worth Rs. 26,429.45 crore across the first three trading days of April. Attention then turns to Wednesday’s Reserve Bank of India decision, with the Repo Rate expected to stay at 5.25%.
In the US, the FOMC minutes are due late Wednesday after the Fed kept rates at 3.50%-3.75%. For USD/INR, the 20-day EMA is 92.95; support lies at 92.35 then 91.35, while resistance is at 93.66 and 95.22.
With the US-Iran deadline hours away, we should prepare for a significant spike in volatility. The outcome is binary, meaning the USD/INR could either surge on news of conflict or drop sharply on a peaceful resolution. Buying options, such as a straddle, could be a prudent way to trade this uncertainty, as it profits from a large move in either direction.
An escalation in the Middle East would almost certainly cause a spike in oil prices, which is historically negative for the rupee. We saw a similar dynamic in 2022 when the conflict in Ukraine sent Brent crude prices soaring above $120 a barrel, putting immense pressure on currencies of oil-importing nations like India. A sustained price above $100 per barrel would make it very difficult for the rupee to strengthen.
Positioning Hedging And Key Levels
We are already seeing foreign investors flee, with over Rs. 26,400 crore pulled from Indian equities in the first three trading days of April. This outflow of capital creates direct demand for US dollars and could accelerate rapidly if the geopolitical situation worsens. This trend makes holding long rupee positions particularly risky until there is more clarity.
The central bank announcements tomorrow add another layer of complexity. While the RBI is expected to hold its rate at 5.25%, we will be listening closely for any hawkish commentary on inflation driven by energy costs. The Fed minutes will be just as important, as they will reveal how concerned US policymakers are about oil prices impacting their own fight against inflation.
From a technical standpoint, the pair is coiled for a breakout around the 93.00 level. We can use options to trade around the key levels, with call options becoming attractive on a firm break above the 93.66 resistance. Conversely, if the situation de-escalates and the price falls below support at 92.35, put options could offer significant value.
For businesses, this is a critical time for hedging. Importers with future dollar payables should consider buying call options to protect against a sharp rise in the USD/INR exchange rate. Exporters, on the other hand, could use put options to lock in a floor for their dollar receivables in case the rupee strengthens unexpectedly on good news.
