The Indian Rupee has gained strength after hitting a record low of about 90.75 against the US Dollar. This increase is thanks to foreign banks stepping in to help. The market is expecting the Reserve Bank of India (RBI) to possibly lower the Repo Rate to 5.25% due to weak US ADP Employment data, signaling possible future interest rate cuts from the Fed. There has been a lot of foreign money leaving India’s stock market, pressuring the Rupee. Even significant sales of shares worth Rs. 8,020.53 crore in early December by Foreign Institutional Investors (FIIs) couldn’t stop this trend. The lack of a trade agreement with the United States and high tariffs on Indian goods have also hurt market sentiment.

Rupee Recovery Optimism

A Reuters poll indicates that there is hope for the Rupee’s recovery if trade deals with the US move forward. Predictions suggest a 0.3% decline, bringing the Rupee to around 89.65 over the next year. Domestically, everyone is watching for the RBI’s upcoming monetary policy announcement, which is expected to include a 25 basis points Repo Rate cut. In the US, the Dollar is struggling due to predictions of an interest rate cut by the Fed. The US Dollar Index is staying near 98.80. Traders expect rate cuts as job conditions deteriorate, highlighted by the loss of 32,000 jobs in November, which was unexpectedly negative. From a technical standpoint, the USD/INR pair is stabilizing around 90.15 after its recent peak. This trend remains upward above the 20-day EMA. The value of the Indian Rupee is greatly influenced by factors like oil prices, inflation, and seasonal demand for the Dollar. While India’s growth encourages foreign investments, high oil import costs and trade deficits may weaken the Rupee. Additionally, changes in inflation affect interest rates and investor interest. With the sharp drop from the record high of 90.75, we are now experiencing high volatility for the USD/INR pair. The recent pullback has created an opportunity due to foreign bank intervention, but the ongoing upward trend still poses a risk. Traders should focus on strategies that can take advantage of significant price movements in either direction in the upcoming weeks.

Reserve Bank Of India Rate Cut Expectations

The market already anticipates the Reserve Bank of India cutting the rate to 5.25% tomorrow. The main risk lies in any changes to this expectation. This potential rate cut stands in stark contrast to the aggressive hikes in 2022 and 2023, which pushed the repo rate to 6.50% to combat inflation. The notable outflow of over Rs. 8,000 crore from FIIs this month is concerning, reversing earlier positive flows throughout 2024, and signals worries about the stalled US trade deal. On the other hand, the US Dollar is weakening due to poor economic data and expected rate cuts from the Federal Reserve next week. The recent report of losing 32,000 private sector jobs sharply contrasts the job gains mostly seen in 2025, leading to a strong likelihood of a rate cut at 89%. A projected decline to the 3.50%-3.75% range would be a significant reduction from rates above 5.25% we observed in late 2023, justifying the Dollar’s current weakness. The combination of a weak Rupee and a declining Dollar creates a setup for increased volatility, making option strategies appealing. Buying straddles or strangles could be advantageous, as they allow us to benefit from a substantial move in either direction after the central bank meetings. This strategy minimizes the risk by not wagering on a specific outcome, which is wise given the mixed signals. For those with a particular viewpoint, the long-term trend for USD/INR appears secure as long as it stays above the 89.40 support level. This recent pullback might offer a chance to buy call options, anticipating a potential retest of the highs and a climb towards 91.00. The breach of the 90.00 level marked a major psychological shift, well beyond the 83-84 range that was dominant for much of 2023 and 2024, indicating a possibility for renewed upward momentum. Create your live VT Markets account and start trading now.

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