The Indian Rupee is close to an all-time low against the US Dollar, currently around 89.00. Everyone is eagerly awaiting the Reserve Bank of India’s announcement on monetary policy, particularly regarding the Repo Rate, which is set at 5.5%.

Effects Of Trade Tensions

Trade issues between the US and India are affecting market expectations for a possible interest rate cut by the RBI. Recent actions from the US, like higher H-1B visa fees and tariffs on pharmaceuticals, are significantly impacting Indian industries that depend on exports to the US. On the other hand, strong festive demand connected to GST cuts may encourage the RBI to keep the current rate. Additionally, the ongoing withdrawal of foreign investments from Indian markets puts more pressure on the Rupee. Despite political tensions related to a possible US government shutdown, the USD/INR pair remains stable. The US Dollar Index is around 98.00, with attention focused on disputes over healthcare benefits and funding bills. Anticipations of more interest rate cuts by the Federal Reserve help keep the Dollar stable. The CME FedWatch tool indicates an 89% chance of a 25 basis point cut to a range between 3.75% and 4.00%. The upcoming JOLTS Job Openings report is expected to show 7.1 million new jobs for August, consistent with previous data.

Currency Market Outlook

We see the Indian Rupee trading near its all-time low at 89.00 against the US Dollar, causing considerable tension ahead of the Reserve Bank of India’s policy decision tomorrow. The market is divided on whether the RBI will lower rates to boost the economy or maintain them due to strong festive demand. This uncertainty implies volatility will be the main theme in the coming days. The pressure on the Rupee is evident from the ongoing selling by Foreign Institutional Investors, who withdrew over Rs. 2,800 crores from the market just yesterday. This trend of capital outflows, which has worsened over the last quarter with more than $5 billion in net sales, is worsened by US trade actions affecting crucial IT and pharmaceutical sectors. These challenges suggest a strategy of buying USD/INR call options, aiming for the psychological 90.00 level. Due to deep divisions among experts regarding the RBI’s next move, the implied volatility on Rupee options is high. We can take advantage of this uncertainty by setting up trades that benefit from significant price changes in either direction, such as a long straddle. This strategy could be profitable whether the RBI unexpectedly cuts rates, weakening the Rupee further, or if they hold steady, potentially leading to a short-term relief rally. We also need to monitor the US Dollar’s strength, particularly with a possible government shutdown today. Historically, similar situations in 2013 and 2018 have led to temporary weakness in the Dollar and disruptions in the vital economic data we depend on. This, together with the market pricing in an 89% chance of a Federal Reserve rate cut next month, could limit the upside for USD/INR if the Rupee manages to stabilize. For businesses, this is a crucial time for hedging. We advise importers with upcoming US Dollar payments to secure current rates by using forward contracts or buying out-of-the-money call options, shielding against a move towards 90.00. This strategy would help protect margins if the Rupee continues to weaken after the RBI meeting. Create your live VT Markets account and start trading now.

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