The Indian Rupee has fallen to nearly 90.50 against the US Dollar as Foreign Institutional Investors (FIIs) sold Rs. 10,403.62 crore worth of Indian stocks in December. In response, the Reserve Bank of India (RBI) reduced its Repo Rate by 25 basis points to 5.25% and announced important market operations. The ongoing trade tensions between the United States and India are causing continued selling by FIIs. Analysts warn that the Rupee could weaken even further to around 92.00 if a US-India agreement doesn’t materialize soon.

RBI Growth Projections

The RBI expects growth to be 7.3% this fiscal year, up from a previous forecast of 6.8%, thanks to positive GDP reports. The central bank also predicts that the Consumer Price Index may reach 4% by Financial Year 2026-27. As the Federal Reserve prepares to announce its policies, the USD/INR exchange rate holds steady near 90.50, remaining above the 20-day Exponential Moving Average. The Fed’s decision could shape the strength of the USD, with a 25 bps rate cut anticipated due to a weak job market. In recent currency movements, the Indian Rupee has seen its largest percentage drop against the Euro, while the USD has faced smaller losses against various currencies. The market is closely monitoring the Fed’s guidance on future monetary policy. With the Rupee moving towards 90.50 against the dollar, a clear trend is evident. The RBI’s recent rate cut to 5.25% contrasts with expectations of a “hawkish cut” from the US Federal Reserve. This growing disparity in interest rates makes holding US dollars more appealing than holding Rupees.

FII Selling Pressure

The significant selling by Foreign Institutional Investors, who have offloaded over Rs. 10,400 crore in shares this month, is creating considerable pressure. This consistent outflow mirrors previous trends; in 2022, total FII outflows reached nearly Rs. 1.21 lakh crore, marking a period of notable Rupee depreciation. The current trend suggests similar sentiments among investors. As the Federal Reserve’s policy meeting approaches on Wednesday, the implied volatility in USD/INR options is expected to increase. While a rate cut to 3.75% is nearly certain, the actual market impact will likely come from the Fed’s guidance for 2026 outlined in its dot plot. If the Fed adopts a hawkish tone, indicating a pause in easing, it would likely boost the USD/INR rate further. With this in mind, traders might consider buying USD/INR call options to benefit from expected Rupee weakness. A call option gives the right to buy at a specified price, allowing for potential upside while limiting risk to the premium paid. This strategy appears wise, especially given the overbought RSI at 70.61, indicating the potential for a short-term pause or pullback before further upward movement. For those seeking a more budget-friendly strategy, a bull call spread could be effective. This means buying a call option at a lower strike price, like 90.50, and selling another call at a higher strike, maybe 92.00. This method reduces initial costs while capping the maximum profit. Technically, the pair remains in a strong upward trend above its 20-day moving average, which currently acts as support near 89.54. A significant break above the all-time high close to 90.70 would confirm a bullish outlook. We will keep an eye on the Indian retail inflation data releasing on Friday, but the varying central bank policies remain the key theme for now. Create your live VT Markets account and start trading now.

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