Insights 
VT 
The Indian Rupee (INR) is currently trading lower against the US Dollar (USD) due to increased demand for the USD, capital outflows, and rising Crude Oil prices. The USD/INR pair has erased previous losses, trading around 85.70, just below the 50-day Exponential Moving Average, a critical level for bullish traders.
The US Dollar Index (DXY) remains stable, lingering near multi-year lows. Despite the broader weakness in the US Dollar, the Rupee is under pressure due to domestic factors, with the Greenback remaining weak for the past five months. Interest-rate cut expectations are rising, with market forecasts indicating a 73.8% probability of a rate cut in September.
Indian Economy Growth
According to the Reserve Bank of India’s Financial Stability Report, the Indian economy is growing robustly, driven by strong rural demand and increased investment activity. The report indicates a GDP growth forecast of 6.5% for FY26. Meanwhile, India’s industrial production declined to 1.2% in May from 2.7% in April, the lowest since September 2024.
Crude Oil prices recovered slightly, keeping pressure on the Rupee, as higher energy costs impact trade balance and fuel Dollar demand. US-India trade talks are progressing, with an interim agreement expected soon, involving reciprocal tariff discussions. Additionally, the reduction of the US remittance tax from 5% to 1% offers relief to Indian expatriates.
Key US economic data releases, including Nonfarm Payrolls, are anticipated to influence market sentiment and Federal Reserve rate-cut expectations. The USD/INR pair is testing critical technical levels around 85.71, poised for potential shifts based on upcoming economic indicators. The Reserve Bank of India continues to balance price stability and growth, intervening in the foreign exchange markets to manage volatility.
The RBI holds meetings bi-monthly to review monetary policy, adjusting interest rates as needed to maintain inflation targets. The bank also strategically intervenes in the FX markets to stabilise the Rupee’s exchange rate, safeguarding against currency risks.
Impact Of Oil Prices
With USD/INR hovering just a shade below the 50-day Exponential Moving Average at 85.70, the market has shown signs of hesitation. Although the wider pressure on the US Dollar has persisted for several months, the Rupee remains on the backfoot. This reflects not only weakness from external sources like rising energy costs but also domestic unease linked to sluggish industrial performance and foreign capital moving out.
We’ve seen oil prices bouncing off recent lows, pushing import-driven currencies like the INR under added stress. Energy prices directly affect the trade balance, and when Brent creeps higher, the immediate outcome is increased demand for USD among Indian refiners and importers. The energy component of India’s import bill, being relatively inflexible, limits options for fiscal adjustment.
Exports may benefit slightly from a weaker Rupee, but that benefit is muted for the current period due to global demand concerns. Meanwhile, the remittance tax rollback from 5% to 1% in the US adds some breathing space for the Indian current account situation, although it doesn’t shift the broader trajectory yet. It may help us avoid disorderly dips, especially with steady inflows from the overseas Indian community.
The Reserve Bank of India, through its steady hand, aims to smooth volatility where necessary, but it appears to be adopting a relatively restrained stance, allowing market forces to act within a defined range. Intervention isn’t about defending any specific number; rather, it’s about nudging back against speculation and extreme swings, especially during thinner liquidity periods.
Industrial output falling to 1.2% in May raises eyebrows, particularly as April stood somewhat firmer at 2.7%. That drop suggests a cooling in activity and complicates rate-setting decisions. Slower production growth can soften inflation risks but underscores a risk to broader domestic growth, especially if rural momentum begins to fade.
We should also account for rate cut expectations out of the US. The current probability of a Federal Reserve policy shift in September stands near 74%, which has been building gradually. This outlook has already baked in softer labour readings, and upcoming Nonfarm Payrolls data could trigger further dovish adjustment if the numbers stall or underperform. That would likely weigh on the Dollar abroad but may only partially soften the Rupee’s downside given local supply-demand dynamics.
Market participants will need to remain attentive to both the technical setup and upcoming macro prints. The current level near 85.70 represents more than just a midpoint—it acts as a key reference in the short term. Breaches above might trigger follow-on buying, particularly from CTAs and directional futures accounts. Below that, we could see a return to the 85.30–85.40 zone, provided there is broader risk appetite and stabilisation in commodity prices.
Patel and colleagues at the central bank will likely allow moderate volatility to persist as long as currency weakness stays orderly. It helps them preserve reserves and protect against excessive speculative positioning. From a trading perspective, this implies minimal outright directional bias unless data surprises force a repricing.
There is also the ongoing matter of US-India bilateral dialogue. If the interim trade agreement includes tariff alignment that benefits exports, that could introduce short-term INR support. However, we are not positioned to price much in yet. Most of that uplift, if it materialises, will settle into medium-term expectations rather than instant action.
With all this in motion, risk parameters need to be adjusted depending on the DXY’s broader condition and tracked against other emerging market currencies. Cross-assets too, such as Treasuries and equities, remain vital—especially in gauging foreign investor sentiment. Foreign capital has been leaving parts of Asia, not solely India, and this has a dampening effect on local currencies regardless of individual balance sheet strength.
At the end of the day, it’s the alignment between local fundamentals, global policy expectations, and real-money demand that shapes forward pricing. We’ll be watching rate differentials closely, particularly into the next RBI policy review, and also how DXY reacts post-payrolls. In that light, strategy will likely continue favouring shorter-term mean reversion trades within a tightened range—possibly with a lean toward USD demand on risk-off days, while keeping options hedged to guard against wider swings.
