The Indian Rupee (INR) strengthened as the US Dollar weakened, influenced by US political events and economic data. The US Dollar Index is low, favouring emerging market currencies like the Rupee, which appreciated to 85.49 against the USD, thanks to foreign investment inflows and equity market gains.

Lower oil prices following the Iran-Israel ceasefire also benefited the Rupee, decreasing trade deficits. Crude oil prices dropped significantly, with WTI trading near $65.20 and Brent at $67.05. On the equity side, the Nifty50 hit its highest since September 2024, and the Sensex rose by 303 points.

Current Account And External Debt

RBI data indicated India had a current account surplus of USD 13.5 billion in the first quarter of 2024–25, a notable improvement from the previous year. However, the full-year current account stayed in deficit, at USD 23.3 billion. Meanwhile, India’s external debt rose by 10% to USD 736.3 billion.

Trade talks between India and the US faced obstacles, particularly regarding import duties. President Trump might extend tariff deadlines, affecting import duties on several countries. Additionally, US budget and policy issues added pressure on the USD, with the Dollar Index down over 10% year-to-date.

This shift in sentiment around the U.S. Dollar has come at a time when capital has been searching for more attractive returns in emerging economies, with India appearing to benefit handsomely. The Rupee’s climb to 85.49 per USD reflects not just a correction in the Greenback’s strength, but a broader tilt by overseas investors towards Indian assets. Equity inflows, especially into frontline indices, have supported this strength, and the performance of the Nifty50 underscores continued risk appetite.

In a climate where global energy prices ease, as seen in both Brent and WTI trades, India’s terms of trade naturally improve. Lower crude prices typically take pressure off the import bill, helping to narrow the trade deficit without requiring additional policy shifts. This trend, combined with a tactically favourable dollar environment, feeds into currency resilience and, by extension, stable foreign exchange derivatives pricing.

Dynamics Of International Trade And Policy

At the same time, external account dynamics are showing mixed signals. Data from the central bank pointed to a quarterly current account surplus—this shift, even if short-lived, lends fundamental support to the currency. Still, we remain wary of the broader fiscal picture. A full-year shortfall of USD 23.3 billion suggests the surplus could be more episodic in nature than structural. Compounding this is the marked increase in external debt, now totalling USD 736.3 billion. While not alarming on its own, such an expansion requires monitoring in the context of global rate settings and repayment schedules.

Trade discussions between Delhi and Washington have hit friction points. Tariff ambiguity, particularly with the former U.S. administration considering deadline extensions, presents hurdles. These ongoing ambiguities potentially skew export-import hedge strategies and may distort medium-tenor volatility expectations. We interpret such developments not just as policy noise, but as material to directional exposure, given their impact on flows and the timing of foreign participation.

From a dollar perspective, the currency’s weakness seems sticky for now. Domestic budget impasses in the U.S. and monetary policy uncertainty continue to weigh on sentiment, reflected clearly in the 10% slide of the Dollar Index over the past months. With the standard inverse reaction already visible in high-beta emerging currencies, this trend adds an additional layer of momentum to INR positioning.

For those of us watching closely from a derivatives standpoint, realignments in implied volatility must be revisited. Any further strengthening of INR may prompt repricings on cross-currency options, especially as spot maintains its bias. Short-dated tenors appear relatively underpriced, given current correlation between equity and FX movements. It’s a conversation worth having, particularly for those managing exposure on both sides of the balance sheet.

As we assess flows this month, what bears watching is how sustained equity strength interacts with macro divergences. If relief in crude carries through and if U.S. policy indecision lingers, then some tactical opportunities may re-emerge, particularly where skew and forward premiums have lagged. That said, upside on the Rupee looks slower from here and not without contest—particularly with debt obligations serving as drag.

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