Middle East Risks Keep Indian Rupee Under Pressure

A sharp rise in oil prices puts the Indian Rupee under pressure.
With Middle East risks persisting, TD Securities expects a risk premium to remain embedded in oil prices.
A recovery is evident in both the US Dollar and US Treasury yields.

USD/INR edges up towards 95.25 in Friday’s opening trade. The pair is approaching the previous day’s high of 95.38, its strongest level in over two weeks. The Indian Rupee (INR) continues to face pressure against the US Dollar (USD) as Middle East risks fuel the surge in oil prices.

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

Near Rs. 9,873, its recent highs, is where the MCX Crude Oil contract expiring on 19 November jumps in early Friday trading.

For economies such as India, heavy dependence on imported oil to meet energy demand leaves their currencies vulnerable when oil prices rise.

Crude faces headline pressure; risk premium supports energy

Ahead of the US midterm elections, a "deal headline barrage" is putting considerable pressure on crude, according to TD Securities. The bank says "persistent headlines of deal talks" are weighing on prices 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 that headline pressure, TD Securities emphasises that "on the ground, the fundamentals remain tight," citing tanker attacks and Houthi pressure. These "appear to have been successful in reducing Mideast flows, at least temporarily." In the bank’s view, "so long as continued attacks keep a risk premium in the market, energy prices should remain well-supported in this higher range."

US Dollar, Treasury yields recover ground

USD/INR is also drawing support from price action that points to a recovery in both the US Dollar and US Treasury yields.

At the time of writing, the US Dollar Index (DXY) is trading around 101.78, having recovered most of its earlier losses. The index, which measures the Greenback against six major currencies, had fallen to 101.59 earlier in the session.

The 10-year US Treasury yield stands near 4.93% at the time of writing, down 0.24%. Most of its initial decline has been reversed after it touched 4.89%, a fresh seven-week low.

Stronger-than-expected preliminary Q3 Gross Domestic Product (GDP) growth in the United States (US) did not prevent pressure on the US Dollar and bond yields. Both weakened even as the core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred inflation measure, rose further.

Annualised economic growth reached 3.4%, the Bureau of Economic Analysis (BEA) reported on Tuesday. That exceeded the 3.2% forecast and the previous reading of 2.2%.

September’s US core PCE inflation rate came in at 3.1% year-on-year (YoY), matching expectations but rising from August’s 3%. Monthly growth matched both forecasts and the previous reading of 0.3%.

USD/INR Technical Outlook

Trading at 95.25 on the daily chart, USD/INR retains a slightly bearish near-term outlook below its 20-period exponential moving average (EMA) of 95.32. The retreat from late-September highs and the break below the short-term EMA indicate that attempts to advance are meeting resistance. Meanwhile, the Relative Strength Index (RSI) stands at 46.94, just below neutral. This points to weakening bullish momentum rather than outright oversold conditions.

The 20-day EMA near 95.32 provides the first resistance level, with 96.00 next. On the downside, key support lies at 94.16, the low recorded on 25 June.

(An AI tool assisted in preparing this story’s technical analysis. Find out more.)

Indian Rupee: Frequently Asked Questions

Which factors are the main drivers of the Indian Rupee?

External developments have a particularly strong influence on the Indian Rupee (INR). Key factors include Crude Oil prices, given India’s heavy reliance on imported oil, and the US Dollar’s value, as most trade is settled in USD. Foreign investment levels also matter. Other major influences are the interest rates set by the Reserve Bank of India (RBI) and its direct intervention in FX 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) intervenes actively in foreign exchange markets to keep the exchange rate stable. It also adjusts interest rates to keep inflation at its 4% target. Rate increases generally support the Rupee through the ‘carry trade’: investors borrow in lower-interest-rate countries and invest in countries offering comparatively higher rates, earning the difference.

Which macroeconomic conditions shape the Indian Rupee’s value?

Inflation, interest rates, GDP growth, the trade balance and foreign investment inflows all help determine the Rupee’s value. Faster economic growth can attract additional overseas investment, increasing demand for the currency. A narrowing trade deficit will ultimately strengthen the Rupee. Higher interest rates are supportive too, particularly higher real rates, calculated as interest rates minus inflation. When risk appetite improves, greater inflows of Foreign Direct and Indirect Investment (FDI and FII) can provide further support.

What effect does inflation have on the Indian Rupee?

The Rupee generally weakens when inflation rises, particularly when India’s inflation exceeds that of its peers, as this reflects devaluation through excess supply. By making exports more expensive, inflation also results in more Rupees being sold to fund foreign imports, adding pressure on the currency. However, higher inflation typically prompts the Reserve Bank of India (RBI) to increase interest rates. This can support the Rupee by attracting greater demand from international investors. Lower inflation has the reverse effects.