The Indian rupee has weakened sharply against the dollar in 2026, pressured by higher oil prices, portfolio outflows and a stronger USD. Year-to-date, INR is down around 6% and touched a record low of just below 97.00 in May, before USD/INR eased back into a broad 94.50–96.00 range. The Reserve Bank of India has sought to support INR via measures to attract foreign capital inflows rather than relying on aggressive interest-rate increases.
On policy, the RBI voted unanimously in early June to keep the repo rate unchanged at 5.25% and retained a neutral stance. It is assessing the effects of the Middle East conflict and weather-related risks on growth and inflation, though the balance of risks has moved towards tighter settings. A 25bp rise later this year would take the policy rate to 5.50%. India’s FX reserves are around USD689bn, equivalent to roughly 10 months of import cover, and RBI intervention alongside prospective capital inflows is expected to limit near-term currency weakness.
Rupee Stability and Volatility Strategies
The Indian Rupee has found some stability after hitting a record low near 97.00 against the dollar in May. We see the Reserve Bank of India’s heavy intervention and its substantial foreign exchange reserves of around $689 billion as the primary reason for this current calm. One-month implied volatility for USD/INR has fallen from over 8.5% during the May sell-off to a more stable 6.2%, reflecting this new environment.
Given the RBI’s active presence, we believe the USD/INR will remain within a 94.50 to 96.00 range in the immediate future. This suggests that selling option volatility could be a prudent strategy. For instance, selling strangles with strikes outside this expected range would allow us to collect premiums while the currency pair consolidates.
Downside Risks and Policy Watch
Despite this temporary stability, the underlying pressure on the rupee remains. With Brent crude holding stubbornly above $115 per barrel and the US Dollar Index pushing past 107.50, the risk is still skewed towards further INR weakness. We can express this view with limited risk by using call spreads, such as buying a 96.00 call and selling a 97.50 call, to position for an eventual breakout.
The RBI is signaling a rate hike later this year, but for now, they are holding rates at 5.25%. This makes next week’s Consumer Price Index data critical, with markets anticipating a year-over-year print of 7.9%. A higher-than-expected inflation number could force the RBI’s hand sooner, putting immediate upward pressure on the USD/INR exchange rate.
Portfolio outflows continue to weigh on the currency, a trend we’ve seen historically during periods of global uncertainty, similar to the 2013 taper tantrum. Foreign institutional investors have been net sellers of Indian equities for five consecutive weeks, with outflows totaling over $4.2 billion since the start of May. Therefore, we advise importers to use the current stability to hedge their dollar payables for the coming months.
