The Indian Rupee is expected to have a good start against the US Dollar on Tuesday. This change comes as the Dollar weakens before the announcement of a new Federal Reserve Chairman. The Indian markets were closed on Monday because of Republic Day. On Friday, the USD/INR pair closed at 91.87, gaining 0.1%. It reached a new high of 92.21, partly due to over Rs. 40,704.39 crore being withdrawn by Foreign Institutional Investors in January. The US Dollar Index fell by 0.4%, reaching its lowest point in more than four months.

Impact of US Relations and Federal Reserve Policies

Concerns about the US’s future relations with the Eurozone and the upcoming Federal Reserve announcement have affected the Dollar’s value. The focus remains on the Fed’s monetary policy, which is anticipated to keep interest rates between 3.50%-3.75%. There is also speculation that Washington might remove 25% tariffs on India for purchasing Russian oil. This has improved the outlook for the Rupee. Comments from the World Economic Forum suggested that tariff removal could enhance the Rupee’s strength. Key factors affecting the Indian Rupee include oil prices, the US Dollar’s value, and foreign investments. The Reserve Bank of India’s actions and interest rate changes are crucial for the Rupee’s stability. Macroeconomic factors like inflation and growth rates also play an important role. Looking back to early 2025, the market was expecting a weaker US Dollar and a stronger Rupee. The Dollar Index (DXY) was struggling around 97.00. However, a year later, the situation has flipped, with the DXY now above 104, supported by a strong US economy.

Outflows and Tariffs Impact

Last year, the market thought that the Federal Reserve would maintain interest rates in the 3.50%-3.75% range. However, ongoing inflation throughout 2025 led to one last rate hike, raising the Fed funds rate to 4.00%-4.25%. This difference in interest rates continues to favor the Dollar and pressures the Rupee. It’s important to note the record outflows by Foreign Institutional Investors (FIIs) in January 2025, which saw over Rs. 40,000 crore withdrawn from Indian stocks, pushing the USD/INR to a peak of 92.21. While FIIs became net buyers in the latter half of 2025, with yearly net inflows reaching nearly Rs. 55,000 crore according to NSDL data, the market remains vulnerable. Any reversal in these outflows could weaken the Rupee significantly. The optimism from early 2025 about potentially lifting US tariffs on Indian oil purchases did not come to pass. Those tariffs are still in effect, removing a key factor that could have strengthened the Rupee. Thus, we shouldn’t expect any positive surprises soon. Given this situation, derivative traders should think about protecting against further Rupee weakness. Buying USD/INR call options can offer a chance to benefit from a possible increase in the exchange rate with limited risk. The path to 95 for USD/INR seems more likely than a decrease, making bearish bets on the pair quite risky. Create your live VT Markets account and start trading now.

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