The rupee weakened at Thursday’s open as USD/INR rose to about 95.75, pressured by firmer crude after renewed concern over a potential breakdown in the US-Iran ceasefire. In morning trade, the MCX Crude Oil June 18 contract was up 0.7% near 8,787, following a 3.6% jump on Wednesday after recouping earlier losses. Higher oil prices tend to erode support for currencies in import-dependent economies, including India.
The US Central Command said it carried out additional “self-defense strikes” on multiple targets in Iran late Wednesday, after Tuesday attacks near the Strait of Hormuz tied to Iran’s downing of a US Apache helicopter. Separately, The Wall Street Journal reported that President Donald Trump told aides to relay via Qatar that the strikes did not signal a “restart of all-out war”. Against this backdrop, Foreign Institutional Investors have been net sellers on every trading day so far in June, with outflows totalling Rs 62,654.34 crore. Domestically, focus turns to May CPI due Friday, expected at 4% year-on-year versus 3.48% in April, after the RBI left the repo rate unchanged at 5.25% last week.
Market Drivers and Positioning
We are positioning for continued pressure on the Indian Rupee as the USD/INR pair tests the 95.75 level. The primary driver is the surge in oil prices, with Brent crude recently crossing $110 per barrel amid escalating US-Iran tensions. Given India imports over 85% of its crude oil, this directly impacts our current account deficit and weakens the currency.
The significant outflow from Foreign Institutional Investors, totaling over Rs. 62,600 crore so far in June, confirms a bearish sentiment towards Indian assets. This sustained selling pressure often precedes further Rupee depreciation, a trend we’ve observed in past periods of high global uncertainty. Therefore, we are cautious about taking any long Rupee positions through futures or options.
Trading Strategy and Risk Management
The upcoming CPI data for May presents a short-term volatility event we can trade. An inflation print significantly above the expected 4% could trigger a hawkish response from the RBI, causing a temporary pullback in USD/INR. We are considering using short-dated options, like straddles or strangles, to profit from the price swing regardless of the direction.
From a technical standpoint, we view the current consolidation as a precursor to another move higher. We will be looking to buy USD/INR call options or long futures contracts if the pair decisively breaks the 96.03 resistance level. Any dips towards the 20-day EMA around 95.50 should be seen as buying opportunities, as long as the broader fundamental picture remains unchanged.
Given the unpredictable nature of the geopolitical situation, hedging is critical for any client with dollar-denominated payables. We are advising importers to lock in forward rates or use call option spreads to cap their upside risk on the USD/INR pair. Relying on a sudden de-escalation between the US and Iran is not a viable strategy in this environment.
