Outlook
The INR is likely to stay sensitive to domestic and global drivers in the near term. A persistent current account deficit and oil price sensitivity continue to weigh on the rupee, while RBI’s flexible intervention approach aims to smooth volatility rather than defend a fixed level. If risk appetite improves and U.S. rate expectations ease, the INR could stabilize; if CAD pressures or geopolitics intensify, further downside could emerge.
Key drivers
- Persistent current account deficit (CAD) driven by a wide trade gap and crude oil imports, exerting downward pressure on the INR. (CAD weakness remains a key overhang)
- Foreign portfolio investment (FPI) outflows from Indian equity and debt markets, influenced by global risk sentiment and U.S. rate expectations. (Flows are a ongoing source of volatility)
- Weak manufacturing exports, with global demand challenges weighing on export performance and the trade balance.
- Policy rate differential with the U.S. narrowing, reducing relative yield attractiveness for Indian assets.
- RBI’s intervention strategy remains flexible: the central bank smooths volatility rather than defending a specific level.
- Geopolitical tensions affecting investor confidence and the INR’s stability.
- U.S. tariffs on Indian exports impacting trade balances and sentiment.
Range
INR/USD sits at 0.011039, just below its 3-month average, having traded in a very stable 4.0% range from 0.010864 to 0.011300.
INR/EUR sits at 0.009286, 2.0% below its 3-month average of 0.009476, with a relatively stable 7.9% range from 0.009085 to 0.009803.
INR/GBP sits at 0.008097, 2.1% below its 3-month average of 0.008269, trading in a fairly volatile 10.0% range from 0.007872 to 0.008659.
INR/JPY sits at 1.7056, 1.6% below its 3-month average of 1.7331, with a relatively stable 6.7% range from 1.6648 to 1.7759.
What could change it
- A material improvement or deterioration in CAD, driven by oil price moves or trade dynamics, could push the INR one way or the other.
- Shifts in global risk appetite and U.S. rate expectations affecting FPI flows into Indian assets.
- A surprise change in RBI policy or smoother/less smooth interventions altering expected rupee volatility.
- Developments around U.S. tariffs on Indian exports or broader bilateral trade policy changes.
- Significant geopolitical developments or oil price swings that alter risk sentiment and external balances.
