The Indian Rupee fell for a fifth straight session on Friday, with USD/INR near the weekly high of 94.38. The US Dollar Index was around 99.00, close to a 10-day high.
Oil prices rose after Iran suspended oil flows through the Strait of Hormuz, which carries almost 20% of global energy supply. WTI traded around $95.00 while holding weekly gains.
Rupee Under Pressure From Energy Shock
Iran had not agreed to restart peace talks with the US, and a CNN report said US military officials are preparing plans to target Iran’s capabilities in the Strait if the current ceasefire fails. Higher oil prices continued to weigh on import-dependent currencies such as the INR.
Foreign institutional investors were net sellers across all four trading days this week, offloading Rs. 8,311.99 crore. Selling resumed after a pause in the last three sessions of the previous week, alongside concerns about earnings and possible changes to government capital spending.
Markets are watching the Federal Reserve decision on Wednesday, with rates expected to stay at 3.50%–3.75%. Attention is on guidance about inflation risks and any rate rise later this year.
USD/INR traded above 94.20, above the 20-period EMA at 93.35. RSI (14) was 59, with support at 93.35 and resistance near 95.20.
Given the Rupee’s continued weakness against the dollar, we should consider strategies that profit from further depreciation. The USD/INR pair is trading firmly above its short-term moving average, suggesting the upward trend has momentum. Buying USD/INR call options with strike prices approaching the 95.00 level could be a direct way to position for a test of the all-time highs.
Positioning And Hedging For Further Depreciation
The situation with oil prices is a critical factor driving this move. With WTI crude holding near $95 a barrel due to the Strait of Hormuz disruption, India’s import costs are surging, putting fundamental pressure on the currency. We saw a similar dynamic in 2022 when high energy prices caused India’s current account deficit to widen significantly, and we expect that pattern to repeat.
Foreign institutional selling is another major headwind, and this week’s outflow of over Rs. 8,300 crore confirms their risk-off sentiment. This level of selling is reminiscent of the record outflows we witnessed in 2022, which preceded a multi-month period of Rupee weakness. This persistent selling makes any near-term recovery for the Rupee unlikely.
With the Federal Reserve meeting next week, we should anticipate heightened volatility. While a rate hike is not expected, a hawkish tone warning about inflation will likely strengthen the US dollar globally, adding more fuel to the USD/INR rally. Traders could use options to position for this event, as implied volatility is likely to increase heading into the announcement.
For those holding Indian assets, it is crucial to hedge currency exposure. Buying USD/INR futures or forward contracts can lock in an exchange rate to protect the dollar value of portfolios from further Rupee declines. This defensive posture is sensible until the geopolitical and foreign investment outlook improves.
