Rupee Advances Despite Oil Shock and Fed Jitters

Key Moments

Rupee Strengthens on Reported RBI Dollar Selling

The Indian Rupee advanced after a flat start against the US Dollar on Friday, with USD/INR sliding toward 96.50 as the Reserve Bank of India stepped in to support the domestic currency.

A Reuters report indicated that the RBI was likely selling US dollars around the 96.80 level. The same report noted that state-owned banks were offering dollars, widely interpreted as activity conducted on behalf of the central bank.

On Thursday, the RBI was also active in both the spot market and the non-deliverable forwards (NDF) market, attempting to cushion the Rupee.

Market participants, however, expect the impact of this support to be temporary. Stronger oil prices and a renewed shift toward expectations of Federal Reserve rate hikes are seen as factors that could soon weigh on the Indian currency.

Geopolitical Tensions Keep Crude Elevated

Oil prices have climbed sharply in recent weeks amid intensified military tensions between the United States and Iran. In response, Yemen’s Iran-aligned Houthi group has shut the Bab el-Mandeb Strait, the southern entry to the Red Sea, further constraining global energy supplies.

With no indication of an imminent diplomatic resolution, concerns are growing that tight oil supply conditions could persist. Such a backdrop is unfavorable for currencies of nations that rely heavily on imported crude, including India.

Higher Oil Rekindles Hawkish Fed Outlook

Rising crude prices have unsettled inflation expectations, reviving speculation that the Federal Reserve could resume tightening policy. According to the CME FedWatch tool, market-implied odds of a rate hike at the Fed’s policy meeting next week are 35.8%, up sharply from 11.8% a week earlier.

This shift has pushed US Treasury yields higher, typically reducing demand for higher-risk currencies. At the time of writing, US Treasury yields were around 4.70%, a level described as the highest since January 2025.

Stronger yields have also underpinned the US Dollar. In Asian trading, the US Dollar Index (DXY), which measures the Greenback against six major peers, was trading firmly near a three-week high around 101.50, the level reached on Thursday.

India’s PMI Data Signals Slower Private-Sector Momentum

India’s flash HSBC Composite Purchasing Managers’ Index (PMI) for July came in at 54.3, down from 57.1 in June, reflecting softer growth across both manufacturing and services.

“Renewed tensions in the Middle East have once again resulted in firms building buffers to manage the uncertainties around the longevity of the supply-side shock. Finished goods and input inventories increased alongside a pick-up in purchasing volumes. Both, output and new export orders rose, even as the overall manufacturing growth eased slightly. Price pressures firmed, with output charge inflation gathering pace and signalling a renewed push to protect margins,” Pranjul Bhandari, Chief India Economist at HSBC, said.

USD/INR Technical Picture: Bias Remains Constructive

USD/INR is trading lower around 96.50 but continues to hold above its 20-day Exponential Moving Average (EMA) at 95.9678, preserving a constructive bullish bias.

Price action relative to this short-term trend indicator suggests that dips are being bought, while the Relative Strength Index (RSI) near 61 indicates firm, but not yet overbought, upside momentum.

On the downside, immediate support is seen around the 20-day EMA near 95.97, a region where buyers would be expected to defend the broader uptrend on pullbacks. On the upside, the all-time high near 97.10 remains the key resistance level to watch.