The Indian Rupee (INR) ended its three-day decline against the US Dollar (USD) on Friday, showing a small recovery after reaching a three-month low. This rise was helped by a weaker US Dollar and lower Crude Oil prices as traders reacted to US President Trump’s choice to postpone military action in the Israel–Iran conflict. During American trading hours, the USD/INR pair decreased to about 86.60. Although it eased from a multi-month high, the pair is still up over 0.50% for the week due to high Crude Oil prices from the ongoing conflict.

Domestic Economic Factors

Several domestic factors also aided the Rupee’s recovery. Strong equity markets and stable global Crude Oil prices improved market sentiment. India’s GDP growth increased to 7.4% in Q4 FY25, inflation stayed below 4% for four consecutive months, and rising GST revenues reflected strong demand and stable formal-sector activity. However, the core sector’s growth fell to 0.7% in May from 6.9% a year earlier, indicating weak performance in heavy industries. On the bright side, India’s stock indices saw a rebound, with the BSE Sensex and NSE Nifty50 both rising by 1.29%, which helped boost sentiment. Crude prices dropped over 2% on Friday but maintained a weekly gain of about 4%, remaining sensitive to developments in the region. The Reserve Bank of India (RBI) cut the repo rate by 50 basis points to 5.5%, keeping its supportive stance. The Rupee also benefited from revised inflation forecasts, predicting CPI at 3.7% for FY26. Retail inflation decreased to a 75-month low of 2.82% in May, thanks to a dip in food inflation below 1%, supporting a more relaxed policy approach. As the Iran–Israel war continued, geopolitical tensions remained high, with US and Israeli leaders considering military actions, while Iranian officials threatened to close the Strait of Hormuz if the conflict escalated. The US Dollar Index fell below 99.00 due to reassessment of risk.

Geopolitical and Market Trends

Manufacturing continues to show signs of weakness, as indicated by the Philadelphia Fed Manufacturing Index, which stayed at -4.0 in June. Traders are now looking forward to upcoming PMI data from India and the US, which could reveal potential changes in economic performance. On the technical side, USD/INR showed signs of a possible pullback after hitting resistance at 87.00, despite earlier bullish indications. The Relative Strength Index cooled a bit but suggested buyers remain in control above 85.80-86.00 unless new pressures arise. The Composite PMI offers insight into India’s business activity, with levels over 50 signaling expansion and a positive outlook for the INR. The next release is set for June 23, 2025. The Rupee found support after a turbulent period, aided by calmer global markets and a temporary dip in energy prices. The Dollar’s weakness on Friday, due to delays in military strategies from Washington, provided immediate relief to the pair, which narrowed from earlier highs but still closed the week positively for the greenback. This situation means buyers are still close to resistance, more so than what fundamental changes might suggest. Home equity markets gained momentum, boosting overall risk sentiment. Coupled with stable oil prices and strong tax collections, there is growing support for domestic demand. These elements create a perception of steady economic activity, particularly in the formal sector. Adding the sub-4% inflation rate and improved GDP figures paints a positive picture. However, the fall in core sector growth—from nearly 7% to below 1%—is concerning for those monitoring industrial output. While broader markets have shrugged off the negativity for now, the weak momentum in capital-intensive sectors can’t be ignored. This suggests risks for industrial production, which could affect sentiment over time. Additionally, oil markets remain sensitive. Though a 2% drop on Friday seems beneficial, the weekly gain stays around 4%. So, while lower energy prices gave temporary relief to the Rupee, the overall situation remains volatile—any escalation in Middle East tensions could reverse these gains. Continued focus on energy prices is critical. Supportive policy from the central bank, with a rate cut of half a percentage point, reassures confidence in managing borrowing costs. This aligns with retail inflation hitting a 75-month low, mainly due to falling food prices. If this trend persists, the current accommodative approach is likely to continue into the next quarter, especially with CPI expected to remain around 3.7%. One key point to watch is whether this monetary and inflation scenario provides strong enough support for the currency. Currently, it offers medium-term backing but won’t fully protect it from sharp geopolitical shifts or Fed-related impacts. Notably, the decline in American manufacturing, as shown in June’s Fed manufacturing index, hints at some resilience in the INR against the USD, at least in the short term. Regarding price movements—important for trade management—the USD/INR pair pulled back after reaching solid resistance at 87.00. Though the RSI has cooled, it still suggests buyers are present above the 85.80–86.00 range. Unless new upward momentum develops, we expect traders to revisit these support levels in the days ahead. Mark your calendars for the June PMIs—both from India and the US—especially if you’re interested in signs of diverging business activity. With Indian composite PMIs last reported above 50, we’re on the lookout for confirmation. Any surprising data, whether higher or lower, could significantly impact short-term positioning. Create your live VT Markets account and start trading now.

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