The Indian Rupee has weakened against the US Dollar at the start of the week. The USD/INR pair has reached a record high of 91.55. This rise is due to foreign institutional investors pulling out funds, a decline in domestic stock performance, and a lack of strong trade agreements between the US and India. In January, foreign investors sold shares worth Rs. 26,052.40 crore over ten trading days and have been net sellers for four consecutive months in 2025. The tension between the US and India increased as the US raised tariffs on Indian imports to 50% due to oil purchases from Russia.

Impact of Upcoming Fiscal Budget

The fiscal budget set to be announced by Finance Minister Nirmala Sitharaman on February 1 may greatly affect the Indian Rupee. The government aims for a fiscal deficit of 4.2% of GDP for FY 2027, which could rise to 4.4% to prioritize growth. Plans also include increased defense spending. The Rupee’s performance against the US Dollar remains weak compared to other major currencies, partly due to trade tensions between the US and EU over Greenland. President Trump’s 10% tariff on EU goods, starting February 1, has led to threats of counteractions from the EU. The current weakness of the Indian Rupee against the US Dollar is a crucial trend to monitor, especially as the USD/INR pair tests its all-time high of 91.55. This situation has been pushed by notable foreign fund withdrawals from Indian stocks, accelerating this month. Data from the National Securities Depository Limited (NSDL) until January 16 shows outflows exceeding Rs. 31,000 crore.

Market Volatility Around the Indian Union Budget

Traders should brace for increased volatility leading up to the Indian Union Budget on February 1. Expectations of a higher fiscal deficit, possibly reaching 4.4% of GDP to stimulate growth, may further pressure the Rupee. Historically, we’ve seen a 15-20% spike in implied volatility for USD/INR options in the two weeks before the budget, making long volatility strategies, like straddles, appealing. Although the US Dollar is strong against the Rupee, it has weakened against other major currencies due to the trade conflict with the EU. The Euro has actually gained strength against the Dollar, with EUR/USD rising 0.5% over the past week to 1.1250, as markets anticipate EU responses. This suggests that the current rise in USD/INR is due more to Rupee weakness than overall Dollar strength. The technical outlook remains positive for USD/INR as long as prices stay above the 50-day EMA around 89.91. A decisive break above the 91.55 high would allow for further upward movement, indicating that buying on dips could be a good strategy. Meanwhile, the CME FedWatch tool indicates a 94% chance that the Fed will keep rates steady in its next meeting, alleviating concerns about sudden hawkish developments that could significantly impact the market. Create your live VT Markets account and start trading now.

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