The Indian Rupee has gained strength against the US Dollar for the third day in a row, with the USD/INR pair starting around 87.60. This support comes from the Reserve Bank of India’s outlook on monetary policy, despite rising trade tensions between the US and India. Recently, US President Trump raised tariffs on Indian imports to 50% linked to India’s purchase of Russian oil. In reaction, New Delhi has criticized these tariffs as “unfair” and emphasized the importance of protecting its national interests. Indian Prime Minister Narendra Modi stated that India would pay the higher tariffs while still prioritizing the needs of farmers.

The US Dollar Weakens

The US Dollar is currently weak, which is impacting the USD/INR pair. The US Dollar Index stands at 98.20 following comments from Federal Reserve officials who expressed concerns about the job market and called for interest rate cuts soon. The Fed is expected to lower borrowing rates by 25 basis points to between 4.00% and 4.25%. The Reserve Bank of India (RBI) has kept the Repo Rate steady at 5.5% while taking a neutral stance amid ongoing trade tensions. It also lowered its inflation forecast for FY 2026 to 3.1%. Although the USD/INR is on a downward trend, it still holds onto some bullish momentum, with resistance at 88.25 and support from the 20-day EMA at 87.08. The recent strength of the Rupee is largely due to the weakness of the US Dollar. The Fed is signaling a rate cut, which is backed by the latest jobs report from August 1, 2025, showing only 95,000 jobs were added, significantly less than expected. This trend appears likely to continue, driving the USD/INR pair towards its support level. However, we cannot overlook the risks posed by the 50% tariffs from the US. Prime Minister Modi’s firm position, combined with a lack of high-level trade discussions, could lead to escalating tensions without warning. This uncertainty suggests increased volatility in the Rupee may be ahead.

Historical Trade Disputes and Volatility

Reflecting on past US-China trade disputes in the late 2010s, where unexpected policy changes caused drastic currency market swings, we see a similar pattern potentially developing for the Rupee. Traders who bet on just one direction could face significant losses. This history advises us to be ready for sudden changes. In light of this, buying options to guard against sharp moves seems wise. A long straddle strategy, which involves purchasing both a call and a put option at the same strike price, could be especially beneficial. This approach profits from significant price shifts in either direction, acting as a hedge against unpredictable trade news. India’s domestic situation remains stable for the time being. July’s inflation rate was 3.0%, below the RBI’s target, reinforcing their decision to maintain interest rates. This relative calm provides a fragile foundation for the Rupee but could easily be disrupted by external factors. Traders should monitor key technical levels to gauge the next major movement. A clear drop below the 20-day EMA at 87.08 could indicate further strength for the Rupee in the short term. Conversely, a rise above the 88.25 resistance level would suggest that geopolitical risks may be overshadowing the weak dollar narrative. Create your live VT Markets account and start trading now.

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