The rupee weakened sharply against the dollar on Wednesday, with USD/INR rising to about 95.77 as crude extended its rebound and foreign fund outflows from Indian equities persisted. WTI gained 1.4% to around $93.00, the highest in more than a week, after prices began recovering on 29 May following revisions announced by US President Donald Trump to a proposed Iran ceasefire agreement. Reuters reported the Reserve Bank of India was likely selling US dollars to cap INR losses, while higher oil prices typically pressure import-dependent currencies such as the rupee.
Geopolitical tension also lifted energy markets after US Central Command said it intercepted Iranian missile and drone attacks and carried out self-defence strikes on Iran’s Qeshm Island in the Strait of Hormuz. Foreign Institutional Investors sold shares worth Rs. 8,362.92 crore on Tuesday, after net sales of Rs. 3,911.68 crore on Monday. The RBI’s three-day policy meeting is under way ahead of Friday’s decision; a PTI poll showed 11 respondents expect the repo rate to be held, while four predict a 25-bps rise. India’s Q1 GDP is expected at 7.2%, down from 7.8%, and technical levels cited include the 20-day EMA at 95.43, RSI near 54.9, supports at 94.46 and 94.03, and resistance at 96.19 and 97.09.
Drivers Of Rupee Weakness And Market Parallels
We are seeing the Indian Rupee weaken significantly, approaching the 95.77 mark against the US Dollar. The primary drivers are surging oil prices above $93 a barrel and sustained selling by foreign institutional investors. This combination is creating strong headwinds for the currency in the coming weeks.
This situation is very similar to what we observed in 2022 when geopolitical events sent oil prices soaring. During the first half of that year, foreign investors pulled a record $28.8 billion from Indian equities, which pushed the USD/INR pair past the 80 mark for the first time. We anticipate a similar pattern of sustained pressure if these conditions persist.
Given the bullish momentum above the key technical level of 95.43, we believe long positions on the USD/INR pair are favorable. Derivative traders should consider buying call options or futures contracts targeting the next resistance level of 96.19. A break above this could pave the way for a test of the all-time high near 97.09.
Implications For Traders And The Role Of RBI Policy
We must watch the Reserve Bank of India’s policy decision this Friday very closely. While the RBI is likely selling dollars to slow the descent, as seen in 2022 when forex reserves fell by over $100 billion to manage volatility, this intervention can only slow the trend, not reverse it. A surprise 25-basis-point rate hike could provide temporary relief for the Rupee, but it may not be enough to counter the strong global factors.
The upcoming RBI policy and GDP data on Friday will inject significant volatility into the market. We recommend using options strategies like long straddles to profit from a large price swing in either direction. This approach allows traders to capitalize on the uncertainty without betting on a specific outcome of the central bank’s announcement.
The core issue remains the price of crude oil, as India imports over 85% of its requirements. As long as WTI crude stays elevated near the $93 mark due to Middle East tensions, the Rupee will remain vulnerable. We should therefore monitor geopolitical newsflow as a primary indicator for the currency’s direction.
