The Indian Rupee (INR) has dropped for the fourth day in a row against the US Dollar (USD), nearing 86.50. This decline is linked to stalled US-India trade negotiations and dwindling hopes for an agreement before the August 1 tariff deadline. India’s trade team, led by Chief Trade Negotiator Rajesh Agrawal, returned from Washington without any resolution. An interim Free Trade Agreement (FTA) is expected later this year, but higher tariffs on Indian exports to the US are likely to remain.

FII Outflows Weaken INR

Foreign Institutional Investors (FIIs) have pulled out Rs. 18,636.98 crores in July, putting more pressure on the INR. Uncertainty in the global market and modest earnings growth from Indian companies have led FIIs to cut back on their investments. Major companies like Reliance are performing poorly, which impacts the Nifty50 index. However, Zomato is experiencing revenue growth. Meanwhile, the US Dollar remains stable, with the US Dollar Index just below 98.00. Trade tensions between the US and the EU are rising, as the EU plans to respond to US tariffs. At home, traders expect the Federal Reserve to keep interest rates steady, with attention on forthcoming PMI data from both India and the US.

A Bearish Outlook on the Rupee

As the Rupee continues to weaken, traders should prepare for more declines and consider buying USD/INR futures contracts. The failure of trade talks led by Mr. Agrawal’s team indicates ongoing challenges. Buying out-of-the-money USD call options could be a cost-effective way to gain from a possible move towards 84.00 against the US Dollar. The significant capital outflow is a concern. Recent data shows this trend is worsening; in May 2024, Foreign Portfolio Investors (FPIs) sold Rs 25,586 crore in Indian equities, indicating a growing risk aversion. Therefore, we recommend that traders look into purchasing Nifty50 put options to protect their portfolios or bet on a further decline from these outflows. Market anxiety is rising, as seen by the India VIX—a key measure of market volatility—recently surging above 20, compared to around 10 earlier in the year. This heightened volatility opens opportunities for strategies like long strangles on major indices, which can be beneficial from significant market moves in either direction, especially given the current uncertainties. The strength of the US Dollar, with the Dollar Index currently over 104, also supports a bearish outlook for the Rupee. Historically, strong dollar periods combined with domestic outflows, like during the 2013 Taper Tantrum, have led to significant currency depreciation. Therefore, maintaining long dollar positions against the Rupee seems to be the best strategy in the coming weeks. Create your live VT Markets account and start trading now.

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