The Indian Rupee has dropped to about 87.90 against the US Dollar late on Tuesday. This decline coincides with a slowdown in India’s Consumer Price Index (CPI), which reported July’s retail inflation at 1.55%. This figure is below expectations and marks the lowest rate since June 2017. With inflation pressures easing, the Reserve Bank of India (RBI) might consider more interest rate cuts. This year, the RBI has already cut the Repo Rate by 100 basis points to 5.5%. In their latest monetary policy meeting, the RBI adjusted its CPI forecast for the current Financial Year from 3.7% down to 3.1%.

Trade Tensions and Market Outlook

Trade tensions between India and the US add to the uncertainty surrounding the Indian Rupee. Upcoming talks scheduled for August 25 in New Delhi come as the US imposes tariffs that impact trade. On Monday, Foreign Institutional Investors sold shares worth Rs. 1,202.65 crores. The US Dollar Index remains steady around 98.50 as we await US CPI data, with predictions of a year-on-year increase of 2.8% for headline and 3.0% for core CPI. If inflation continues to rise, it could influence the Federal Reserve’s interest rate decisions in September, where there is an 88% chance of a 25 basis point cut. The USD/INR pair shows a bullish trend, supported by technical indicators. The 20-day EMA provides support at 87.24, while resistance is expected near the August 5 high of 88.25.

Rising Dollar and Emerging Market Pressure

The Indian Rupee’s slide to 87.90 against the dollar follows a familiar trend. July 2025’s retail inflation cooling to 3.5% puts pressure on the RBI. In the past, similar low inflation levels led to significant interest rate cuts that weakened the Rupee. Given these conditions, the RBI may need to consider another rate cut in its next monetary policy meeting to encourage growth. This potential shift in monetary policy compared to the United States is significant. Recently, foreign institutional investors sold over Rs. 15,000 crores in Indian equities last month, indicating their response. Meanwhile, the US Dollar Index remains strong above 105 due to persistent inflation in the US. A strong dollar usually puts more pressure on emerging market currencies like the Rupee. We remember the sharp Rupee decline during the 2022 Federal Reserve hiking cycle, which resulted in nearly $29 billion in FII outflows from India. In the upcoming weeks, we should think about buying USD/INR call options to benefit from a potential upswing. A break above the recent high of 88.25 seems likely, and options with an 88.50 strike for September 2025 offer a solid risk-to-reward profile. This strategy allows us to profit from a rising USD/INR while limiting our downside risk to the premium paid. The technical outlook supports this optimistic view, with the pair trading well above its key moving averages. Implied volatility is likely to increase ahead of the next RBI and Federal Reserve meetings. Thus, establishing long positions now, before rising volatility raises options costs, is a wise strategy. Create your live VT Markets account and start trading now.

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