The Indian Rupee strengthens against the US Dollar for the third consecutive day, with the USD/INR pair opening near 87.60. Support stems from the Reserve Bank of India’s monetary policy outlook despite escalating US-India trade tensions.
US President Trump recently increased tariffs on Indian imports to 50%, linked to India’s purchase of Russian oil. In response, New Delhi criticised these tariffs as “unfair” and prioritised its national interests. Indian PM Narendra Modi declared that India would pay extra tariffs without sacrificing farmer interests.
The US Dollar Weakens
The US Dollar sees weakness, contributing to the USD/INR movement, with the US Dollar Index lingering at 98.20. This occurred as Federal Reserve officials expressed concerns about labour market conditions, advocating for interest rate cuts soon. The Fed is expected to cut borrowing rates by 25 basis points to 4.00%-4.25%.
India’s RBI kept the Repo Rate at 5.5% with a neutral stance amid US-India trade tensions. The RBI also reduced its inflation forecast for FY 2026 to 3.1%. The USD/INR remains on a losing streak, though its bullish momentum is intact, with crucial levels at 88.25 acting as resistance and the 20-day EMA offering support at 87.08.
The Rupee’s recent strength is largely a story of US Dollar weakness. The Federal Reserve is signaling a rate cut, a view reinforced by the latest US jobs report from August 1st, 2025, which showed the economy adding only 95,000 jobs, falling well short of expectations. For now, we see this trend continuing, pushing the USD/INR pair towards its support level.
However, we cannot ignore the 50% tariffs imposed by the US, which creates significant risk. With PM Modi’s firm stance and no high-level trade talks currently scheduled, the situation could escalate without warning. This uncertainty suggests that volatility in the Rupee is likely to increase in the coming weeks.
Historical Trade Disputes and Volatility
We remember looking back at the US-China trade disputes in the late 2010s, where sudden policy announcements caused sharp, unpredictable swings in the currency markets. A similar pattern could emerge for the Rupee, punishing traders who are positioned for only one direction. This history teaches us to be prepared for sudden reversals.
Given this backdrop, we believe buying options to protect against sharp moves is a sensible strategy. A long straddle, which involves buying both a call and a put option at the same strike price, could prove useful. This position profits from a significant price swing in either direction, serving as a hedge against unpredictable trade news.
We should also consider that India’s domestic situation appears stable for now. July’s inflation reading came in at 3.0%, staying below the RBI’s target and supporting its decision to hold interest rates steady. This domestic calm provides a fragile anchor for the Rupee, but it could easily be dislodged by international pressures.
Traders should closely watch the key technical levels for confirmation of the next major move. A decisive break below the 20-day EMA at 87.08 could signal further Rupee strength in the short term. Conversely, a move back above the 88.25 resistance level would indicate that geopolitical risks are starting to outweigh the weak dollar narrative.
