The Indian Rupee remains steady around 88.90 against the US Dollar amidst US-India trade tensions, continuing its trend near the historic high of 89.10. This market position extends as Foreign Institutional Investors reduce their investments in India due to the trade strains caused by US tariffs on Indian imports and New Delhi’s oil purchases from Russia.

Foreign Institutional Investors have sold substantial equity shares in the Indian stock market, totalling Rs. 1,29,870.96 crore between July and September, and Rs. 3,502.34 crores in October. Despite these sell-offs, the Indian stock market saw a recent uptick, with Nifty50 gaining 2.45%.

Stable US Dollar Amidst Global Changes

The US Dollar remains stable, bolstered by political unrest in Europe and Japan’s leadership change, which caused fluctuations in the Euro and Yen. The US Dollar Index trades near 98.20, with Federal Reserve rate cuts expected in upcoming meetings.

USD/INR trades at approximately 89.00, with a bullish trend suggested by key technical indicators. The pair could dip if it breaks previous lows, while a rise beyond the peak of 89.12 could push it towards 90.00, reflecting ongoing fiscal and political uncertainties.

Based on the current situation, we see the USD/INR pair holding firm near its all-time high, driven by persistent US-India trade tensions. The ongoing exodus of foreign capital from Indian stocks is the primary force weakening the Rupee. This heavy selling by Foreign Institutional Investors (FIIs) is a trend that traders must watch closely.

The FII selling of nearly Rs. 1.3 lakh crore last quarter is significant, but we should remember the precedent set back in 2022. During that period, aggressive global monetary tightening triggered a record annual outflow of over Rs. 2.7 lakh crore from Indian equities, pushing the Rupee to new lows. The current capital flight, while serious, shows a similar dynamic where global risk factors are directly impacting the Rupee’s stability.

Approaching the Psychological Mark

As the pair approaches the psychological 90.00 mark, we anticipate the Reserve Bank of India will increase its intervention to curb volatility. India’s foreign exchange reserves remain robust, last reported at over $642 billion, giving the central bank considerable firepower to sell dollars and cap extreme upside moves. Therefore, while the trend is bullish, a sudden, sharp appreciation past 90.00 seems unlikely in the short term.

For derivative traders, this suggests that strategies with a defined upside may be prudent. A bull call spread could be an effective way to position for further gains while limiting risk, perhaps by buying an 89.25 call and simultaneously selling a 90.00 call. This capitalizes on the upward momentum but also accounts for the strong resistance expected at the 90.00 level due to likely central bank action.

On the US Dollar side, the ongoing government shutdown is causing some domestic uncertainty. However, looking back at the 35-day shutdown in 2018-2019, the market’s reaction was relatively contained, indicating traders may view this as short-term political theatre rather than a fundamental economic threat. The cancellation of key data like the Non-Farm Payrolls report does, however, leave the market navigating with less visibility.

The market’s expectation of two more 25 basis point rate cuts from the Federal Reserve this year seems to be a key factor limiting the dollar’s strength. Yet, we must remain cautious, as the latest US Core CPI data showed inflation is still sticky at 3.4%, which could complicate the Fed’s decision to ease policy. Fed Chair Powell’s speech this Thursday will be critical in confirming or challenging these dovish bets.

Given the conflicting pressures, with a weak Rupee sentiment on one hand and a potentially capped US Dollar on the other, implied volatility in USD/INR options is expected to increase. Traders could consider strategies like long straddles to profit from a significant move in either direction, particularly if the current tight trading range around 88.90 finally breaks. This approach allows a trader to benefit from the eventual resolution of this tension without betting on the specific direction.

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