The Indian opened marginally weaker at 94.69 against the US dollar on Tuesday, 23 June, slipping by 1 paise despite support from softer crude oil prices amid progress in US-Iran negotiations.
According to a Reuters report, market participants said Monday’s decline in the rupee was not driven by any significant flow-related activity and largely ran counter to prevailing market expectations, catching traders by surprise.
Currency dealers noted that the focus has gradually shifted from oil prices to the US Federal Reserve’s policy outlook. Rising expectations of a Fed rate hike in September are beginning to weigh on Asian currencies, including the rupee, they said.
“It appears the risk for the rupee is now shifting from oil to the Fed,” a currency trader at a private sector bank told Reuters. The trader added that, with Brent crude largely remaining below the $80-per-barrel mark, elevated US Treasury yields have become a bigger concern for the domestic currency.
According to Reuters, exporter hedging activity has increased in recent sessions, although underlying demand for dollars remains firm.
Meanwhile, US Treasury yields moved higher on Monday, with the benchmark two-year yield touching a 16-month high as investors priced in the possibility of further interest-rate hikes later this year. Fed funds futures currently indicate nearly a 75% probability of a rate increase by September, adding pressure on emerging-market currencies.
Softer oil prices offer relief to Rupee
According to market experts, recent developments in the global energy market are supporting the Indian rupee. The latest RBI Bulletin noted that prices moderated in June despite continued fragility in global energy supply chains.
Analysts point out that the US decision to grant a 60-day waiver on Iranian oil sanctions, coupled with progress in US-Iran peace negotiations in Switzerland, has helped ease concerns over supply disruptions. As a result, Brent crude prices have retreated below the $80-per-barrel mark, reducing pressure on India’s import bill and external balances.
Experts also highlighted encouraging signals from the Reserve Bank of India’s Real Effective Exchange Rate (REER) data. The rupee’s REER eased to 86.2 in May from 87.76 in April, indicating that the domestic currency remains undervalued relative to its trading partners. This suggests the rupee could have further room for appreciation if global conditions remain supportive.
Stronger dollar and trade talks remain key variables
However, experts caution that the rupee’s gains could be capped by a strengthening US dollar. The Dollar Index has climbed to around 101, its highest level in more than a year, supported by the Federal Reserve’s hawkish stance and lingering uncertainty over the durability of the US-Iran peace process.
Market participants note that while an undervalued rupee provides a competitive advantage, the real benefit will materialise only if India’s export sector can capitalise on it.
Attention is now turning to ongoing trade discussions between India and the United States. The arrival of the top US trade negotiator in India this week is being closely watched as both countries work toward finalising an interim trade agreement.
Experts believe that securing a favourable deal could enhance India’s export competitiveness, attract greater foreign investment, and strengthen the country’s medium-term external position. India is reportedly seeking not just a trade agreement but a strategic advantage over regional manufacturing and export rivals such as Vietnam and other ASEAN economies.
Rupee Outlook
According to Amit Pabari, MD at CR Forex Advisors, 94.30 continues to act as a strong support level, having held on multiple occasions in recent sessions. On the upside, 94.80 remains the immediate resistance. A break above 94.80 could open the door towards the next resistance zone around 95.20.
While easing oil prices and improving inflows remain supportive for the rupee, a stronger US dollar could keep USD/INR volatile in the near term.
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