Middle East risks keep the Indian Rupee under pressure

The Indian Rupee comes under pressure amid a sharp rise in oil prices.
A risk premium is likely to remain embedded in oil prices as Middle East risks persist, TD Securities expects.
A recovery is evident in both the US Dollar and US Treasury yields.

Pressure on the Indian Rupee (INR) against the US Dollar (USD) persists as Middle East risks keep oil prices elevated. Early on Friday, USD/INR edges up towards 95.25, moving closer to the previous day’s 95.38 peak, its highest level in over two weeks.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

The MCX Crude Oil contract due to expire on November 19 surges towards its recent highs of Rs. 9,873 in Friday’s early trade.

For economies such as India, which depend heavily on imported oil to meet their energy requirements, rising crude prices are unfavourable for their currencies.

Can the risk premium support energy as headlines weigh on crude?

Crude is facing considerable pressure from a "deal headline barrage" before the US midterm elections, according to TD Securities. The bank says "persistent headlines of deal talks" are weighing on the market and expects this pattern to continue into the vote. However, it does not expect Iran to accept a deal "just before the tense elections."

Despite this, "on the ground, the fundamentals remain tight," TD Securities emphasises. It highlights tanker attacks and Houthi pressure, which "appear to have been successful in reducing Mideast flows, at least temporarily." In the bank’s assessment, "so long as continued attacks keep a risk premium in the market, energy prices should remain well-supported in this higher range."

How is the recovery in the US Dollar and US bond yields supporting USD/INR?

USD/INR is also drawing support from signs of a recovery in both the US Dollar and US Treasury yields, as reflected in their price action.

After falling to 101.59 earlier in the day, the US Dollar Index (DXY) has recouped most of its initial losses to trade around 101.78 at the time of publication. The index measures the Greenback against six major currencies.

The 10-year US Treasury yield has similarly recovered most of its early decline after touching a fresh seven-week low of 4.89%. At the time of writing, it remains down 0.24%, near 4.93%.

Pressure on the US Dollar and bond yields emerged despite stronger-than-expected preliminary third-quarter Gross Domestic Product (GDP) growth in the United States (US). The core Personal Consumer Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred inflation measure, also moved higher.

An annualised economic expansion of 3.4% was reported by the Bureau of Economic Analysis (BEA) on Tuesday, exceeding the 3.2% forecast and the previous reading of 2.2%.

September’s US core PCE inflation came in at 3.1% year-on-year (YoY), matching expectations and rising from 3% in August. Month-on-month growth stood at 0.3%, unchanged from the previous release and in line with estimates.

USD/INR Technical Analysis: Can the Pair Reclaim Its Short-Term EMA?

A mildly bearish near-term outlook persists for USD/INR on the daily chart, with the pair trading at 95.25, below the 20-period exponential moving average (EMA) of 95.32. Following a retreat from its late-September highs, the break below the short-term EMA indicates that attempts to move higher are meeting resistance. Meanwhile, the Relative Strength Index (RSI) stands at 46.94, just below neutral, pointing to weakening bullish momentum rather than outright oversold conditions.

The June 25 low of 94.16 provides key support on the downside. For any recovery, the first resistance lies near the 20-day EMA at 95.32, with 96.00 the next level to watch.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Indian Rupee: Frequently Asked Questions

Which key factors drive movements in the Indian Rupee?

External developments have a particularly strong influence on the Indian Rupee (INR). Among the main drivers are crude oil prices, given India’s heavy reliance on imported oil; the US Dollar’s value, as most trade is conducted in USD; and the scale of foreign investment. The interest rates set by the Reserve Bank of India (RBI) also play a major role, alongside its direct intervention in foreign exchange markets to stabilise the exchange rate.

How does Reserve Bank of India policy affect the Indian Rupee?

To facilitate trade, the Reserve Bank of India (RBI) actively intervenes in the foreign exchange market to keep the exchange rate stable. It also adjusts interest rates in an effort to maintain inflation at its 4% target. An increase in interest rates generally supports the Rupee through the ‘carry trade’. Under this strategy, investors borrow in countries where interest rates are lower and invest the proceeds in countries offering relatively higher rates, earning the difference.

Which macroeconomic indicators shape the Indian Rupee’s value?

The Rupee’s value responds to inflation, interest rates, economic growth (GDP), the trade balance and foreign investment inflows. Faster growth can attract additional overseas investment and increase demand for the currency, while a narrowing trade deficit will eventually strengthen it. Higher interest rates also support the Rupee, particularly when real rates, or interest rates minus inflation, rise. Greater risk appetite can encourage inflows of Foreign Direct and Indirect Investment (FDI and FII), providing further support to the currency.

What effect does inflation have on the Indian Rupee?

Inflation generally weighs on the Rupee, especially when it exceeds the levels seen in India’s peer economies, as it reflects a loss of currency value through oversupply. By making exports more expensive, inflation also results in more Rupees being sold to pay for foreign imports, adding pressure on the currency. However, higher inflation typically prompts the Reserve Bank of India (RBI) to raise interest rates. This can support the Rupee by attracting greater demand from international investors. Lower inflation has the reverse effect.