Indian Rupee slumps as dashed hopes of US-Iran resolution lift oil prices

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The Indian Rupee (INR) starts the week on a negative note against the US Dollar (USD), with the USD/INR pair rising 0.5% to near 95.00.

The Indian Rupee opens on a negative note against the US Dollar as oil prices jump amid US-Iran resolution uncertainty.
Iran wants the recognition of its authority near the Strait of Hormuz.
Indian PM Modi urges citizens to reduce fuel consumption, avoid foreign travel, and non-essential gold purchases.

The Indian Rupee (INR) starts the week on a negative note against the US Dollar (USD), with the USD/INR pair rising 0.5% to near 95.00. The pair gains significantly as the Indian Rupee faces the heat of a big jump in the oil price, following comments from United States (US) President Trump, in a post on Truth Social, that Iran’s response to Washington’s peace proposal is “totally unacceptable”.

As of writing, the WTI Oil price is up a little over 5% to near $96.40. 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. Higher oil prices have also resulted in a sharp increase in the US Dollar, cementing hopes that the Federal Reserve (Fed) will keep interest rates at their current levels by the year-end.

During the press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades 0.3% higher to near 98.10.

Iran demands its sovereignty on Strait of Hormuz

According to a social post from US President Trump, he dismissed Iran’s response to the US one-page memorandum of understanding (MoU), calling it “totally unacceptable”, as Tehran wants the recognition of its authority near the Strait of Hormuz, a scenario that will allow Iran to collect taxes from ships passing through that passage, CNN reported.

Along with Iran’s sovereignty over the Strait of Hormuz, it wants the US to compensate for war damages, the release of frozen Iranian assets as well as the lifting of sanctions.

US President Trump’s dismissal of Iran’s response has dashed hopes of a near-term resolution between the US and Iran.

Indian PM Modi urges reducing fuel consumption

The impact of higher oil prices appears to be starting to hurt the Indian economy, with Indian Prime Minister (PM) Narendra Modi urging the general public to reduce fuel consumption, avoid unnecessary foreign travel, and non-essential gold purchases for a year, which are aimed at conserving India’s forex reserves.

The worsening of India’s trade balance condition due to a significant depreciation in the Indian Rupee amid higher oil prices has raised fears of high inflation expectations, a scenario that will limit households’ spending power and discourage the Reserve Bank of India (RBI) rate-setting committee from reducing interest rates further.

FIIs continue to dump Indian equities

Foreign Institutional Investors (FII) continue to pare their stake in the Indian stock market as oil prices remain higher amid the absence of a breakthrough in US-Iran negotiations. So far in May, Foreign Institutional Investors (FIIs) have remained net sellers in four of five trading days and have offloaded their stake worth Rs. 11,072.35 crore.

Technical Analysis:

USD/INR trades firmly at around 95.00 at the press time. The pair extends its advance above the 20-day exponential moving average (EMA) at 94.28, reinforcing a bullish near-term tone. The positive slope of the 20-day EMA suggests underlying trend support, while the Relative Strength Index (RSI) around 61 stays in bullish territory without yet signaling overbought conditions, hinting that upside momentum remains constructive.

On the downside, initial support is seen at the 20-day EMA near 94.28, where a pullback could find buyers on a first test. A daily close back below that level would weaken the immediate bullish structure and open room for a deeper correction toward 94.00. Looking up, the pair aims to revisit the all-time high of 95.50 posted on May 5.

(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.