Indian Rupee bounces back on US-Iran deal optimism, RBI’s intervention
- The Indian Rupee gains ground against the US Dollar, following the RBI’s intervention and a decline in oil prices.
- US President Trump expressed confidence that negotiations with Iran are in “final stages”.
- India’s HSBC Manufacturing PMI arrives lower at 54.3 in May vs. 54.7 in April.
The Indian Rupee (INR) extends its recovery against the US Dollar (USD) on Thursday after underperforming for almost two weeks. The USD/INR corrects to near 96.30 from its historic highs slightly above 97.00, as the Indian Rupee bounces back due to synergic support from a sharp decline in oil prices and the Reserve Bank of India’s (RBI) intervention.
According to a Reuters report, traders point to strong central bank intervention to shore up the INR, which has hit successive record lows over recent sessions. Traders added that the RBI’s intervention was likely intended to cool the persistent bearish bias on INR.
There have been numerous events of the RBI's intervention through offshore and Non-Deliverable Forwards (NDFs) since the Middle East war started to counter excessive one-way moves against the Indian Rupee.
Currencies from economies, such as India, which rely heavily on oil imports to meet their energy needs, attract bids following a sharp correction in oil prices.
Indian Rupee capitalizes on correction in oil prices
During the press time, the WTI Oil price trades with caution near Wednesday’s low of around $96.30. The oil price faced a sharp selling pressure on Wednesday after United States (US) President Donald Trump said that Washington is in the “final stages” of finalizing a deal with Iran.
"We’re in the final stages of Iran. We’ll see what happens. Either have a deal or we’re going to do some things that are a little bit nasty, but hopefully that won’t happen,” Trump said, Bloomberg reported.
FIIs turn out to be net sellers in Indian stock market on Wednesday
On Wednesday, Foreign Institutional Investors (FIIs) emerged as net sellers again and offloaded their stake worth Rs. 1,597.35 crore. Overseas investors also remained net sellers on Tuesday and pared their stake worth Rs. 2,457.49 crore.
The sentiment of FIIs toward the Indian stock market remains grim as elevated oil prices have raised concerns over India Inc.’s earnings projections. Also, increased government payments toward high energy products have diminished their spending power toward infrastructure, employment generation, power, and other critical areas.
US Treasury yields correct on Iran optimism
A sharp correction in the US Treasury yields, following the decline in oil prices, has also weighed on USD/INR. 10-year US Treasury yields drop to near 4.59% from 4.69%, the highest level seen since the subprime crisis posted on Tuesday.
US bond yields surged as elevated oil prices have lifted US inflation expectations, forcing traders to price out the possibility of the Federal Reserve’s (Fed) interest rate cuts this year. While hawkish Fed bets are still intact, as the US headline inflation has already increased to 3.8% Year-on-Year (YoY) in April, the highest level seen in almost three years.
According to the CME FedWatch tool, the odds of the Fed delivering at least one interest rate hike this year are 51%, while the rest favor that benchmark lending rates will remain unchanged in the current range of 3.50%-3.75%.
India's HSBC Composite PMI expands moderately in May
India's HSBC Composite Purchasing Managers' Index (PMI) came in lower at 58.1 in May, down from 58.2 in April. A mild growth slowdown in the overall business activity came in regard to soft Manufacturing PMI, while the service sector activity expanded at a faster pace. The Manufacturing PMI drops to 54.3 in May vs. 54.7 in April. The Services PMI has come in higher at 58.9 from the previous reading of 58.8.
Technical Analysis: USD/INR still holds above 20-day EMA
USD/INR trades lower at around 96.30 at the press time. However, the pair holds a clear bullish bias as spot remains above the 20-day Exponential Moving Average (EMA) at 95.36.
The Relative Strength Index (RSI) drops to around 66 after hitting overbought levels, hinting that upside momentum has cooled down but not yet exhausted.
On the downside, initial support is located at the 20-day EMA near 95.37, where a daily close below would signal waning bullish pressure and open room for a deeper correction toward 95.00. Looking up, the pair could extend its advance toward 98.00 if it manages to recover above 97.00.
(The technical analysis of this story was written with the help of an AI tool.)
Indian economy FAQs
The Indian economy has averaged a growth rate of 6.13% between 2006 and 2023, which makes it one of the fastest growing in the world. India’s high growth has attracted a lot of foreign investment. This includes Foreign Direct Investment (FDI) into physical projects and Foreign Indirect Investment (FII) by foreign funds into Indian financial markets. The greater the level of investment, the higher the demand for the Rupee (INR). Fluctuations in Dollar-demand from Indian importers also impact INR.
India has to import a great deal of its Oil and gasoline so the price of Oil can have a direct impact on the Rupee. Oil is mostly traded in US Dollars (USD) on international markets so if the price of Oil rises, aggregate demand for USD increases and Indian importers have to sell more Rupees to meet that demand, which is depreciative for the Rupee.
Inflation has a complex effect on the Rupee. Ultimately it indicates an increase in money supply which reduces the Rupee’s overall value. Yet if it rises above the Reserve Bank of India’s (RBI) 4% target, the RBI will raise interest rates to bring it down by reducing credit. Higher interest rates, especially real rates (the difference between interest rates and inflation) strengthen the Rupee. They make India a more profitable place for international investors to park their money. A fall in inflation can be supportive of the Rupee. At the same time lower interest rates can have a depreciatory effect on the Rupee.
India has run a trade deficit for most of its recent history, indicating its imports outweigh its exports. Since the majority of international trade takes place in US Dollars, there are times – due to seasonal demand or order glut – where the high volume of imports leads to significant US Dollar- demand. During these periods the Rupee can weaken as it is heavily sold to meet the demand for Dollars. When markets experience increased volatility, the demand for US Dollars can also shoot up with a similarly negative effect on the Rupee.