Indian Rupee Slides as Oil Rally & Geopolitics Pressure

Key Moments

Rupee Retreats as Oil Extends Gains

The Indian Rupee continued to weaken against the US Dollar (USD) on Friday, extending the previous session’s losses and effectively giving back almost all the gains accumulated earlier in the week. The USD/INR pair advanced to near 94.92 as the latest upmove in crude oil prices, driven by heightened tensions in the Middle East, weighed on the domestic currency.

At the start of Friday’s session, the MCX crude oil futures contract expiring on November 19 rose 0.65% to trade near Rs. 9,550. That level is close to the recent highs of Rs. 9,661 hit earlier in the week. Elevated crude benchmarks tend to be negative for currencies of countries that rely heavily on imported energy, such as India, as they can worsen trade balances and heighten inflation risks.

Middle East Risk Premium Underpins Crude

Geopolitical strains in the Middle East have remained a key driver of the latest oil rally. Analysts at Commerzbank noted that regional tensions “intensified after a drone attack on Saudi Arabia’s Shaybah oil field killed two people and injured two others,” though they emphasized that the overall impact on crude prices ultimately remained contained.

They pointed out that “oil prices briefly jumped on reports suggesting a wider withdrawal of US diplomatic personnel from the Gulf,” but that the move lost momentum once “Washington clarified that the order was limited to Saudi Arabia,” prompting a pullback in earlier gains.

The withdrawal of US non-emergency staff from the Gulf region has nevertheless reinforced market concerns that military confrontation involving Iran could escalate further, sustaining a geopolitical risk premium in energy markets.

Domestic Activity Data: PMI Signals Ongoing Strength

On the macroeconomic front, India’s flash HSBC Global Purchasing Managers’ Index (PMI) data for October indicated that overall private sector activity remained solid. The Composite PMI came in at 56.7, up from the final 55.9 recorded in September, with robust services activity providing the main lift to the headline gauge.

Pranjul Bhandari, Chief India Economist at HSBC, commented: “Private-sector manufacturing activity continued to expand, with growth of output and new orders broadly unchanged at last month’s levels. However, the steady pace of new order growth masks the fastest increase in new export orders since June 2025. Manufacturers responded by increasing their stocks of purchases and finished goods. Input cost inflation eased, while the rise in selling prices softened to its weakest in almost four years.”

Key PMI Readings

Global Focus: US PMI Data in View

On the external data front, investors are awaiting the release of preliminary US S&P Global PMI figures for October, scheduled for publication at 13:45 GMT. Consensus expectations point to continued expansion in both manufacturing and services sectors, although at a more moderate pace.

USD/INR Technical Picture

From a technical standpoint, USD/INR is trading around 94.92 on the daily chart, maintaining a bearish short-term bias as it remains below the 20-day exponential moving average (EMA) at 95.38.

The pair has fallen sharply from recent highs, and the 14-day Relative Strength Index (RSI) stands at 37.94, hovering just above oversold territory. This suggests that while downward momentum persists, selling pressure could be starting to ease in intensity.

On the upside, the 20-day EMA around 95.38 represents initial resistance, continuing to cap recovery attempts. A sustained move above this level would be required to lessen the prevailing bearish bias. On the downside, the June 25 low at 94.15 is viewed as a critical support area for the pair.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Fundamental Drivers of the Indian Rupee

The Indian Rupee (INR) is highly sensitive to external variables. Crude oil prices play a crucial role, given India’s substantial dependence on imported energy. Movements in the US Dollar are also important, as a significant share of India’s trade is denominated in USD. The scale of foreign investment flows further shapes currency dynamics, while direct foreign exchange operations by the Reserve Bank of India (RBI) and its interest rate decisions are key levers influencing the Rupee.

Role of the Reserve Bank of India

The Reserve Bank of India (RBI) intervenes in the foreign exchange market with the objective of maintaining a relatively stable exchange rate environment to support trade. It also aims to anchor inflation near its 4% target through adjustments in policy rates. Higher interest rates generally support the Rupee, partly due to the “carry trade,” in which investors borrow in low-yielding currencies and invest in higher-yielding markets like India to capture the rate differential.

Macroeconomic and Inflation Dynamics

Several macroeconomic variables influence the Rupee’s valuation, including inflation, interest rates, gross domestic product (GDP) growth, trade balance, and foreign investment inflows. Stronger growth can draw additional overseas capital, raising demand for INR. An improving trade balance can also underpin the currency over time. Elevated real interest rates – nominal rates adjusted for inflation – tend to be supportive as well, particularly in risk-on environments that encourage Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII).

Inflation has a complex impact on the currency. Higher inflation, especially if it exceeds that of peer economies, typically undermines the Rupee by eroding purchasing power and increasing the cost of exports, which can lead to more Rupees being sold to pay for imports. At the same time, elevated inflation often prompts the RBI to raise interest rates, which can attract foreign capital and offset some of the negative currency effects. Conversely, lower inflation generally has the opposite implications for monetary policy and the exchange rate.