The Indian Rupee has recently dropped, hitting a two-month low against the US Dollar, which has increased by 0.55% to around 91.15. This decline is due to Foreign Institutional Investors (FIIs) pulling out Rs. 4,781.24 crore from the Indian stock market, as US-India trade talks have stalled. In January, FIIs sold more than they bought on nine of the ten trading days, cutting their investments by Rs. 21,706.27 crore. Although officials from India and the US made optimistic comments, no significant trade agreements emerged. According to HSBC economists, weak capital inflows are a major issue for the Indian Rupee.

Inflation Data and Reserve Bank Policies

Inflation data for India shows price pressures in retail and wholesale markets. However, the Reserve Bank of India (RBI) might still lower interest rates. The Consumer Price Index (CPI) rose by 1.33% year-over-year, staying within the RBI’s acceptable range of 2%-6%. Although the US Dollar Index dropped slightly, the USD gained ground after Federal Reserve officials suggested keeping interest rates high. The CME FedWatch tool indicates no rate changes for January. President Trump has hinted at possible new Fed Chair announcements, with top candidates being Economic Adviser Kevin Hassett, and Fed Governors Christopher Waller and Michelle Bowman. USD/INR prices are targeting a peak near 91.50, backed by a bullish Relative Strength Index (RSI) and strong price support above the 20-day Exponential Moving Average (EMA). A drop below this level could indicate further declines. Differences between US and Indian monetary policies create clear trading signals. The Federal Reserve is adopting a strict approach to curb inflation, while the RBI is likely to lower rates. This fundamental divergence suggests continued strength in the USD/INR pair.

Strategies for USD/INR Movements

We’re observing heavy selling from Foreign Institutional Investors, who have withdrawn over Rs. 21,700 crore from Indian equities this month. This is a big change compared to most of the second half of 2025, when FIIs were net buyers. The standstill in US-India trade talks is driving this exit and is likely to keep pressure on the rupee. The expectation of an RBI rate cut is supported, as December’s CPI inflation of 1.33% is significantly below the central bank’s target range. A similar low-inflation situation happened in late 2025 before the RBI’s last rate cut in November. Meanwhile, Fed officials are emphasizing the need to maintain rates between 3.50%-3.75%. Given this trend, strategies that benefit from a rising USD/INR could be effective, such as purchasing call options with strike prices near the 91.50 all-time high. Technical indicators suggest strong upward momentum, with the RSI at 64.23, indicating it is not yet overbought. This approach offers a defined-risk opportunity to engage in the anticipated upward movement. Implied volatility on USD/INR options has risen to nearly 7%, up from an average of 5.5% in late 2025, leading some options to be more costly. Therefore, using bull call spreads could effectively reduce entry costs while aiming for the 91.50 resistance level. We should also keep an eye on the announcement of the new Fed Chair, as a particularly hawkish choice could boost the dollar’s strength. Create your live VT Markets account and start trading now.

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