Indian Rupee declines due to compounding pressure from higher oil prices, Treasury yields

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The Indian Rupee (INR) continues to underperform against the US Dollar (USD) on Wednesday, trading close to its fresh all-time lows. The USD/INR pair holds onto gains near 97.00 as elevated oil prices due to fears of a prolonged closure of the Strait of Hormuz remain a key drag on the Indian Rupee.

The Indian Rupee continues to decline due to elevated oil prices and rising US Treasury yields.
US President Trump threatens to resume military attacks on Iran.
The Fed will likely deliver at least one interest rate hike this year.

At press time, the WTI Oil price is marginally lower around $102.50, but is up over 50% since the onset of the war in the Middle East.

Currencies from economies, such as India, which rely heavily on oil imports to meet their energy needs, tend to underperform in a high-oil price environment.

Trump threatens military actions if Iran doesn’t agree to a deal

Oil prices continue to remain elevated as negotiations between the United States (US) and Iran over multiple issues, such as Tehran’s nuclear ambitions, compensation for war damages and the US blockade of Iranian seaports remain unsolved.

Iran's Deputy Foreign Minister Kazem Gharibabadi said on Tuesday that lifting sanctions, releasing frozen funds, ending blockade are major demands included in Iran's recent proposal to the US, IRNA reported.

Meanwhile, US President Donald Trump has threatened to resume military attacks on Iran if Iran doesn’t agree to a deal soon. Trump said on Tuesday that he doesn’t favor a war, but Washington can hit Iran again in the next few days.

“I hope we don’t have to do the war, but we may have to give them another big hit,” Trump told reporters on Tuesday. When asked how long he would wait, Trump said, “Well, I mean, I’m saying two or three days, maybe Friday, Saturday, Sunday. Something maybe early next week — a limited period of time.”

In response, Iran has stated that it is prepared for any military aggression. On Tuesday, a spokesperson from the Iranian army also said that Iran’s army would “open new fronts” against the US if it resumes attacks on the country.

FIIs resume selling pressure on Tuesday

After remaining net buyers for three straight trading days in the Indian stock market, the selling pressure from Foreign Institutional Investors (FIIs) has returned amid growing concerns over India’s economic outlook due to higher energy prices. On Tuesday, FIIs emerged as net sellers, paring their stake worth Rs. 2,457.49 crore. In the previous three trading days, FIIs had cumulatively bought shares worth Rs. 4,330.32 crore.

Higher US Treasury Yields diminish appeal of riskier currencies

Surging US Treasury yields due to firm expectations that the Federal Reserve (Fed) will not cut interest rates this year are also hurting risk-sensitive currencies, such as the Indian Rupee. The 10-year US bond yields have posted a fresh yearly high at 4.69% during the day.

According to the CME FedWatch tool, the odds of the Fed delivering at least one interest rate hike this year is 56.3%, while the rest almost favor a ‘hold’.

Technical Analysis:

USD/INR trades higher at around 96.85 as of writing. The pair holds well above the 20-day Exponential Moving Average (EMA) at 95.29, keeping the near-term structure firmly supported.

The 14-day Relative Strength Index (RSI) at 72.96 sits in overbought territory, suggesting bullish momentum remains strong but is becoming stretched, which could encourage brief corrective pauses rather than a clean continuation higher.

On the downside, immediate support is seen at the 20-day EMA near 95.29, where a pullback would be expected to attract dip-buying interest while the broader uptrend remains intact. A daily close back below this moving average would hint at a deeper correction toward lower levels, but as long as price holds above it, the path of least resistance stays to the upside despite overbought conditions. Looking up, the pair might aim to extend its advance towards 98.00 if it stabilizes above 97.00.

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

Indian Rupee FAQs

What are the key factors driving the Indian Rupee?

The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.

How do the decisions of the Reserve Bank of India impact the Indian Rupee?

The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.

What macroeconomic factors influence the value of the Indian Rupee?

Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.

How does inflation impact the Indian Rupee?

Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.