The Indian Rupee is trading at about 88.80 against the US Dollar. Despite a US government shutdown, the Dollar remains stable at around 99.65 on the US Dollar Index. A new US bill aims to fund the government until January and to reverse recent job cuts.

Focus on Indian Retail Inflation

Indian Retail Inflation data will be released on Wednesday. Analysts expect that year-on-year retail inflation will rise by 0.48% in October, down from 1.54% in September. This drop is linked to falling food prices. Such expectations may lead the Reserve Bank of India to lower interest rates further, as they have already reduced the Repo Rate to 5.5%. In currency movements, the Indian Rupee has strengthened against the Japanese Yen. The USD/INR pair remains above the 20-day Exponential Moving Average, with solid support at 87.07 and resistance at 89.12. Usually, high inflation increases a country’s currency value, as central banks raise interest rates to address it, attracting foreign investment. High inflation can hurt gold prices because it raises opportunity costs, while lower inflation can help gold since interest rates typically decrease. With the US government shutdown ending, a significant uncertainty for the US Dollar has been resolved, providing temporary stability. The USD/INR pair is currently consolidating around the 88.80 level. This calm period offers a chance to prepare for the next major event, which is the Indian inflation data due this Friday. Market expectations indicate a sharp decline in India’s October CPI to just 0.48%, down from September’s 1.54%. If this occurs, it will fall well below the Reserve Bank of India’s target range of 2-6%, a level of reduced inflation not seen consistently since early 2023. A low inflation rate will likely lead to another interest rate cut by the RBI, putting further pressure on the Rupee.

Effects of Foreign Institutional Investments

Recent net buying by Foreign Institutional Investors, who acquired over Rs. 4,500 crore in shares last Friday, indicates some renewed confidence. However, this optimism may be offset by the expectation of lower yields following a possible RBI rate cut. Therefore, we should approach these inflows cautiously, as changes in monetary policy will likely drive currency movements in the coming weeks. Given the expected fluctuations around Friday’s inflation report, buying USD/INR call options with a short-term expiry may be a smart move. This strategy allows us to benefit from a potential rise in the pair towards its all-time high of 89.12 if inflation comes in weak, while limiting our risk to just the premium we paid. We should consider strike prices slightly above the current level, like 89.00, to capture this potential increase. It’s also important to watch the key technical support at the 20-day moving average, which is currently around 88.63. If the price breaks decisively below this level, it would suggest that bullish momentum is diminishing, signaling a need to rethink a long position. If inflation data surprisingly comes in higher than expected, the Rupee could strengthen quickly, making risk-defined strategies like options particularly effective. Create your live VT Markets account and start trading now.

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