Insights 
VT 
The Indian Rupee (INR) remains stable against the US Dollar (USD) as the Reserve Bank of India’s (RBI) interventions keep it above the record low of 88.87. Inflation in India is expected to decrease to 1.7%, prompting speculation about potential interest rate cuts.
The USD/INR pair remains around 88.70 during Asian trading hours. Recent gains in the INR were driven by positive news on India-US trade discussions and foreign institutional inflows since October 7. Meanwhile, pressure mounts on the INR due to inflation forecasts.
Challenges for the US Dollar
The US Dollar faces challenges with the ongoing government shutdown affecting paychecks and likely lasting through the Columbus Day holiday. The US Dollar Index (DXY) remains subdued, trading around 98.90, down over 0.5% from the previous session.
The Federal Reserve is contemplating further rate cuts, with a 96% chance of an October cut, followed by another in December. Technical analysis of USD/INR indicates a bullish outlook, with potential resistance at 88.87, while support is tested at the nine-day EMA of 88.70.
Key influences on the INR include Crude Oil prices, US Dollar valuation, foreign investment levels, RBI interventions, and interest rate settings. Macroeconomic factors such as inflation, GDP growth, and the balance of trade also significantly impact the Rupee’s value.
We see the USD/INR pair caught in a tight range, defined by the Reserve Bank of India’s defence near the 88.87 all-time high and underlying Rupee weakness. This compression between a powerful seller (the RBI) and fundamental pressures creates a specific trading environment. Derivative traders should note that implied volatility is likely to be suppressed by the central bank’s actions.
The case for a weaker Rupee is building, driven by India’s rapidly cooling inflation. After a period of stubborn food-price-driven inflation that we saw for much of 2024, the current projection of 1.7% is well below the RBI’s target band. This data strongly signals that the RBI will soon shift from intervention to cutting interest rates, reducing the Rupee’s appeal.
Headwinds for the US Dollar
However, the US Dollar is facing its own significant headwinds, preventing a straightforward rally in the USD/INR pair. The ongoing US government shutdown is creating economic uncertainty, while the CME FedWatch Tool shows markets pricing in a 96% probability of a Fed rate cut this month. This dovish Fed stance, a response to cooling US inflation numbers seen throughout 2024, caps the dollar’s strength against other currencies.
The RBI’s credibility in defending the Rupee is extremely high, and we should not underestimate its firepower. India’s foreign exchange reserves, which we saw climb back above $650 billion earlier this year, provide more than enough ammunition to absorb market pressure for weeks. Their consistent interventions have shown a clear intent to prevent a disorderly depreciation past the 88.87 level.
Given these opposing forces, selling volatility appears to be the most prudent strategy for the coming weeks. Options traders could consider selling short-dated straddles or strangles, a strategy that profits if the USD/INR pair remains range-bound between its current support and the RBI’s line in the sand. This approach allows traders to collect premium from the expected lack of significant movement.
Nevertheless, we must prepare for a potential breakout if the fundamental pressures become too great for the RBI to contain. A sustained move above the 88.87 high would signal that the central bank has stepped back, which could trigger a rapid move higher towards 89.50. Traders should use strict stop-losses on any volatility-selling positions and could place buy-stop orders above this critical resistance level to capture a potential breakout.
