The Indian Rupee hit a new record low against the US Dollar on Tuesday, with USD/INR near 95.63. Renewed US-Iran tensions raised concerns about a prolonged closure of the Strait of Hormuz, which handles almost 20% of global energy supply.
WTI oil was flat, slightly below $96.00 at the time of reporting. Higher oil prices tend to pressure economies that depend on imports for energy, including India.
Donald Trump rejected Iran’s counterproposal as a “stupid proposal” and said, “Ceasefire is on life support.” CNN reported that Trump had become more frustrated with talks and was weighing a return to major combat operations.
Foreign Institutional Investors were net sellers in five of six trading days in May, selling Rs. 19,509.91 crore. This came amid uncertainty over earnings projections as oil prices stayed elevated.
India’s April CPI was 3.48% YoY, below the 3.8% estimate and up from 3.4% in March. US April CPI is due at 12:30 GMT, with headline inflation forecast at 3.7% versus 3.3% previously.
The US Dollar Index was up 0.35% at about 98.25, and Trump’s May 13-15 China visit is due to include talks with Xi Jinping. USD/INR stayed above its 20-day EMA at 94.4221, with RSI near 64 and the next level near 96.00.
With the Indian Rupee hitting a new low of 95.63 against the dollar, we must position for further weakness in the coming weeks. The primary drivers are geopolitical tensions threatening oil supplies and the resulting surge in crude prices, which directly harms India’s import-heavy economy. Derivative traders should consider buying USD/INR call options or going long on futures contracts to profit from this upward momentum.
Historically, we’ve seen this play out; during the 2022 energy crisis, a sustained spike in oil prices was a key factor that pushed the rupee from around 75 to over 83 against the dollar. The heavy selling by Foreign Institutional Investors, who have already pulled over Rs. 19,500 crore this month, is adding fuel to the fire. This is reminiscent of the 2013 taper tantrum, where foreign outflows of over $11 billion in just three months caused a sharp depreciation in the rupee.
The divergence between US and Indian monetary policy expectations will also strengthen the dollar. With US inflation projected to hit 3.7%, the Federal Reserve is likely to maintain a hawkish stance, a lesson we learned from the aggressive rate-hiking cycle of 2022-2023. This makes holding dollars more rewarding and suggests any dips in the USD/INR are likely to be viewed as buying opportunities.
Geopolitical uncertainty surrounding the upcoming meeting between the US and Chinese leaders is increasing demand for the safe-haven dollar, a phenomenon we saw when the US Dollar Index (DXY) surged from 96 to over 100 in just a few weeks at the start of major global conflicts. The technical picture confirms this bullish sentiment, with the pair targeting the 96.00 level. Traders should watch the 20-day EMA at 94.42 as a critical support level for the ongoing uptrend.
