The Indian Rupee strengthened against the US Dollar, ending a two-day decline. This shift comes as the Dollar Index fell and new trade data improved market sentiment. A smaller trade deficit, lower global crude oil prices, and better local conditions supported the Rupee. The USD/INR exchange rate dipped about 0.50% to around 86.05, down from a high of 86.36 during the American session. A weaker US Dollar and recent trade data helped the Rupee, although traders remain cautious ahead of important US announcements.

Geopolitical Tensions And The Reserve Bank’s Role

New Delhi is closely watching the Iran-Israel conflict to ensure energy security. The Reserve Bank of India’s efforts to manage currency fluctuations are helping to stabilize the Rupee, despite concerns about potential increases in oil prices. In May 2025, India’s trade deficit reached $21.88 billion. Imports fell by 1.7% due to reduced energy prices, while exports decreased by 2.2%. However, Indian exports to the US rose, indicating that US tariffs had a limited impact. Wholesale price inflation in India dropped to 0.39% in May 2025. Lower fuel prices and food costs played a significant role in reducing inflation, with a slowdown in manufacturing price growth. Monthly wholesale prices slightly decreased by 0.06%. The Reserve Bank of India aims to reduce currency volatility through various measures. They have also proposed new guidelines for Rupee Interest Rate Derivatives, which are expected to increase transparency and efficiency in the market.

US Economic Indicators And Market Reactions

The US Dollar Index fell to 97.68 after a sharp decline in the Empire State Manufacturing Index, suggesting a downturn in regional manufacturing. Traders are looking ahead to the upcoming Federal Reserve meeting for potential changes in interest rates. The USD/INR exchange rate is currently near 86.05, showing slight bullish momentum according to the 14-period RSI. If it rises above 86.50, it may signal further strengthening of the Rupee; a decline below that may prompt selling. The recent recovery of the Indian Rupee is mainly due to a weaker US Dollar and new trade data, relieving some pressure from earlier. The decrease in India’s trade deficit in May provided support, with fewer imports linked to lower global energy prices, which significantly impact India’s foreign balance. This trend of reducing outflows while maintaining a steady inflow helps ease demand for foreign currency. The Dollar Index’s drop was partly fueled by disappointing US factory data, making it challenging for the Dollar to recover consistently. Weakness in American regional manufacturing, highlighted by the Empire State data, revealed some market vulnerabilities. This contributed to the Rupee’s gains, easing some uncertainty experienced earlier in the week. Geopolitical tensions in the Middle East continue to cause unease. Policymakers are closely monitoring the situation, especially regarding oil markets. Any new disruptions could push up crude prices, potentially increasing India’s fuel costs and affecting the Rupee. However, the central bank’s approach to managing volatility remains proactive. Their intervention strategies continue to mitigate sudden currency moves, and upcoming derivative reforms aim to enhance liquidity further. The mid-year changes to the Rupee Interest Rate Derivatives framework aim to reduce friction and improve clarity among participants. These draft proposals are designed to foster deeper engagement and enhance price discovery in near-term swaps and futures. We’ll be watching how traders adapt their hedging strategies in response to these new transparency expectations. With wholesale price inflation declining to under 1%, driven by falling energy costs and a slowdown in manufactured goods prices, there is more room for positive sentiment in bond markets. This decrease, if it continues, could lessen the price pressure from producers to consumers. As liquidity improves, we may see growing confidence in domestic economic factors, providing additional support for the Rupee. Technically, the Dollar-Rupee pair is trading slightly below the short-term resistance around 86.50. A sustained rise above this level could lead to a brief rally for the Rupee. However, a dip below 86 may reverse some of the recent gains, especially if international factors become less favorable. Upcoming decisions from the US central bank, along with a policy review, might introduce more volatility. If interest rates remain unchanged but comments on inflation are more aggressive, demand for the Dollar could increase. In that case, traders might quickly reassess their positions. Conversely, if the Fed opts for a dovish stance amid weaker US data, many may move away from Dollar-heavy strategies, allowing the Rupee to strengthen further. Overall, we’re closely monitoring the range between 86.00 and 86.50. This corridor is crucial for now, with market participants adjusting positions as they await more clarity on international policies and India’s shifting export dynamics. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now