MUFG’s analysis indicates that the Indian Rupee (INR) may struggle due to rising money market rates and limited capital inflows. The Reserve Bank of India’s attempts to inject liquidity may not be enough to support the INR in these challenging conditions. The INR faces a tough outlook as it navigates these issues. Recently, the Reserve Bank of India announced more than US$23 billion in liquidity injection on a Friday, bringing the total to over US$40 billion since last December. Yet, money market rates have continued to increase. One major issue for the INR in foreign exchange and rate markets is the lack of capital inflows. The future of the INR appears uncertain as it tackles these external financial pressures. Current pressures on the Indian Rupee show that money market rates keep rising despite the central bank’s substantial liquidity injections. For example, the overnight call money rate has approached 6.95% this month, indicating that the more than $40 billion added since late last year hasn’t eased the pressure. This suggests that the INR is likely to weaken further. The root cause is the ongoing shortage of capital inflows, which intensified in the final quarter of 2025. Foreign portfolio investors sold nearly $2.5 billion in Indian assets during that time, a sharp contrast to the modest inflows earlier in the year. Without new foreign capital, demand for dollars exceeds supply, causing the Rupee to weaken. This situation is similar to what we saw in 2022 and 2023 when strong rate hikes by the U.S. Federal Reserve led to capital leaving emerging markets. Although the global rate environment has changed, U.S. assets remain attractive, reducing investment flows into India. As a result, the Rupee is still sensitive to global risk sentiment and U.S. monetary policy shifts. For traders, this suggests preparing for further Rupee weakness against the U.S. dollar in the upcoming weeks. We believe buying out-of-the-money USD/INR call options is a cost-effective way to take advantage if the pair breaks through recent resistance. These strategies allow participation in a potential move towards the 84.50 level while clearly limiting risk. Currency pair volatility has been increasing, making it riskier to sell futures outright and raising option premiums. Therefore, we suggest using option spreads, such as a bear put spread on the INR, to reduce entry costs and hedge against volatility changes. This approach provides a clearly defined profit and loss zone, which is suitable for the current uncertain market. Moving forward, we will closely watch the weekly foreign reserve data and any new announcements from the Reserve Bank of India. If the Rupee experiences a short-lived rally due to central bank intervention, it could provide a good opportunity to set up bearish positions. The fundamentals of tight liquidity and weak capital flows are likely to drive the market in the near term.

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