The rupee was little changed against the US dollar on Thursday after a firmer prior session, with USD/INR hovering near 95.72 even as India approved the removal of capital gains tax on foreign portfolio investment in government bonds. The policy step is intended to support overseas flows; in equities, FIIs were net sellers on Monday, disposing of Rs. 5,616.56 crore, and foreign investors have been net sellers in all three trading days so far in June.
Geopolitics and energy remained in focus after Donald Trump said Iran had agreed not to pursue nuclear weapons and that Iran’s Ayatollah, referenced as Supreme Leader Mojtaba Khamenei, was involved in talks; he also cited a possible MoU that could reopen the Strait of Hormuz as early as this week, while warning a US blockade on Iranian sea ports could last until Labour Day on 7 September. In India’s afternoon trade, MCX Crude opened 1.2% lower near 9,120, though still close to Wednesday’s 10-day high of 9,290. Markets also awaited Friday’s RBI decision, with the repo rate seen steady at 5.25%, and US May NFP, a key Fed input; technically, USD/INR held above the 20-day EMA at 95.47 with RSI around 54.8, eyeing resistance at 96.65 and 97.09 and support at 95.00 and about 94.00.
Foreign Investment Flows And Rupee Sentiment
We are seeing the USD/INR pair holding steady around 95.72, which suggests the market is pausing before major events. The Indian government’s decision to remove the capital gains tax on overseas bond investments is a positive move to attract foreign capital. However, we note that Foreign Portfolio Investors (FPIs) have been significant net sellers, pulling over $3.5 billion from Indian equities in the last quarter, a trend this new policy aims to reverse.
The persistent selling pressure from FIIs has been a primary driver of the Rupee’s recent weakness. Data from the National Securities Depository Limited (NSDL) confirms this outflow trend across emerging markets as investors seek safety in US assets. We believe that while the tax exemption is a welcome step, it may not be enough on its own to immediately reverse such a strong sentiment.
The geopolitical situation with Iran remains a significant headwind for the Rupee. As a net importer of oil, India’s Current Account Deficit is highly sensitive to crude prices; historically, every $10 per barrel increase in oil prices widens the deficit by approximately 0.4% of GDP. Any failure in the US-Iran negotiations that keeps oil prices elevated will likely cap any potential gains for the INR.
Major Event Risks And Trading Strategy
Looking ahead to Friday, we face two major event risks that will likely inject significant volatility into the market. The Reserve Bank of India is expected to hold its repo rate at 5.25%, but we will be watching the commentary for any hawkish shift in its stance on inflation. A more aggressive tone than anticipated could provide temporary support for the currency.
Simultaneously, the US Nonfarm Payrolls (NFP) report will be a critical driver for the US Dollar. A strong jobs number would reinforce the case for the Federal Reserve to maintain its current policy, strengthening the dollar and putting pressure on the Rupee. We saw a similar dynamic in late 2024 when robust US economic data sent the Dollar Index (DXY) surging, impacting all emerging market currencies.
Given the uncertainty, we are advising traders to prepare for a breakout in volatility. Derivative strategies such as buying a long straddle, which involves purchasing both a call and a put option at the same strike price, could be effective. This position would profit from a significant price move in either direction following Friday’s news events.
Specifically, we are watching the key technical levels mentioned. A break above the 96.65 resistance level could trigger a rapid move towards the all-time high, while a drop below the 20-day EMA support at 95.47 could open the way for a deeper correction. We recommend positioning option strategies around these levels to capture the next directional move.
