Rupee Steady as Policy Signals and Oil Keep Caution

Key Moments

Rupee Opens Flat Amid Firm Oil Prices

The Indian Rupee (INR) began Thursday’s session largely unchanged against the US Dollar (USD), consolidating the strong performance seen on Wednesday. The USD/INR pair was trading around 95.72 in early dealings, holding onto the prior day’s gains as elevated crude prices and stalled United States (US)-Iran talks continued to cloud the outlook.

At the commodity open, MCX Crude Oil futures started the day 1.2% lower, trading near 9,120. Despite the pullback, prices remained close to the 10-day high of 9,290 reached on Wednesday. Currencies from oil-import-dependent economies such as India typically face pressure in an environment of persistently high energy prices.

Trump Comments Keep Focus on US-Iran Negotiations

US President Donald Trump reiterated his confidence in achieving an early agreement with Iran. Speaking on The New York Post’s “Pod Force One” program on Wednesday, Trump said that Iran had agreed not to pursue nuclear weapons, noting that “Iran’s Ayatollah [referring Supreme Leader Mojtaba Khamenei] is involved in negotiations with Washington” and that he would meet him at some point. He nonetheless cautioned that Tehran could reverse its stance and resume its nuclear ambitions.

Addressing the potential timing of a US-Iran accord, Trump indicated that a memorandum of understanding (MoU) could lead to a reopening of the Strait of Hormuz as early as this week. However, he also acknowledged that the existing US blockade on Iranian seaports might remain in place until Labor Day, September 7.

Policy Support: India Removes Capital Gains Tax on Bond Inflows

Earlier in the day, the Indian Cabinet approved the elimination of capital gains tax on foreign portfolio investment in government bonds. The measure is designed to bolster foreign capital flows into the Indian economy and address recent outflow pressures.

The decision comes against a backdrop of sustained selling by Foreign Institutional Investors (FIIs) in domestic equities, which has been a key factor behind the Rupee’s sharp decline. On Monday, FIIs were net sellers in Indian equity markets, divesting holdings worth Rs. 5,616.56 crore. Overseas investors have remained net sellers in all three trading sessions so far in June.

Upcoming RBI Decision and US Labor Data in Focus

Looking ahead, the Reserve Bank of India’s (RBI) monetary policy announcement on Friday is expected to be the primary catalyst for the Rupee. Market participants anticipate that the RBI will keep the Repo Rate unchanged at 5.25% while maintaining a hawkish policy tone, as elevated energy prices have disrupted inflation expectations.

In the US, investors are preparing for the release of May Nonfarm Payrolls (NFP) data on Friday. The labor market report is expected to have an important influence on the Federal Reserve’s (Fed) policy outlook, which in turn could affect USD dynamics and spill over into USD/INR trading.

USD/INR Technical Picture: Consolidation Above Key Support

In opening trade, USD/INR was nearly flat around 95.72, with the pair preserving a mild bullish bias as it held above the 20-day Exponential Moving Average (EMA) at 95.47. Price action remained concentrated near recent highs, while the Relative Strength Index (RSI) hovered around 54.8, indicating steady but not overstretched upside momentum.

On the downside, the 20-day EMA near 95.47 represents the closest support and defines the immediate demand area. A break below this level would be needed to suggest a more pronounced corrective move toward the June 2 low at 95.00, followed by the May 7 low around 94.00. On the upside, a move above the May 28 peak at 96.65 could open the way for a retest of the all-time high at 97.09.

Indian Rupee: Key Drivers and Macro Backdrop

The Indian Rupee (INR) is highly sensitive to external factors. Crude Oil dynamics are crucial given India’s heavy reliance on imported energy, while the US Dollar’s value is pivotal because most global trade is invoiced in USD. The scale and direction of foreign investment also exert significant influence on the currency.

The Reserve Bank of India (RBI) plays an active role in foreign exchange markets, intervening to smooth volatility and support exchange rate stability. The central bank also targets inflation around 4% through its interest rate framework. Higher domestic interest rates tend to be supportive for the Rupee, partly due to carry trade flows, in which investors borrow in low-yielding currencies to invest in higher-yielding markets.

A range of macroeconomic fundamentals impact the INR, including inflation, interest rates, economic growth (GDP), the balance of trade, and foreign capital inflows. Stronger growth can attract greater overseas investment, boosting demand for the Rupee. A less negative trade balance is typically constructive for the currency over time. Higher, especially positive real interest rates (nominal rates adjusted for inflation), also tend to favor the Rupee. A broader risk-on environment generally encourages both Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII), which can further support the currency.

Inflation has a complex relationship with the Rupee. Elevated inflation, particularly relative to peer economies, is usually negative for the currency as it reflects erosion of purchasing power and can make exports less competitive, prompting additional Rupee selling to pay for imports. At the same time, higher inflation often prompts the RBI to raise interest rates, which can attract international investors and provide some support to the currency. The reverse typically holds when inflation is lower.