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Indian Rupee remains higher despite oil strain, hawkish Fed bets

FXStreet · 2026-09-07T05:33:57Z
Indian Rupee remains higher despite oil strain, hawkish Fed bets
  • The Indian Rupee trades higher against the US Dollar at the start of the week.
  • Market experts warn INR’s rally due to strong FCNR(B) deposits could be capped.
  • Investors shift their focus to the US CPI data for August.

The Indian Rupee (INR) gains against the US Dollar (USD) at the start of the week. The USD/INR pair drops to near 94.38 as the significant increase in forex reserves due to overwhelming response by Non-Residents to Reserve Bank of India’s (RBI) special foreign deposits window has strengthened the Indian currency.

INR outperformance underpinned by RBI Dollar inflows and reduced left-tail risks

Analysts at MUFG highlight that the Indian Rupee has been a notable outperformer, pointing to “strong outperformance in the Indian Rupee, driven by much higher-than-expected Dollar inflows from RBI’s FCNR(B) FX measures, reaching above US$130bn in total as of 31 Aug.”

The bank advised that investors should not be gung-ho about the Indian currency, as it still thinks USD/INR should trend higher over time. But it ruled out the possibility of a sharp INR depreciation, clarifying that RBI’s FX measures have given authorities meaningful firepower and ammunition.

Higher oil prices could weigh on INR

Rising oil prices due to restricted energy supply through the Strait of Hormuz on the back of US-Iran conflicts could dent the rally in the Indian Rupee.

The continued exchange of attacks between the US and Iran regarding the control of Hormuz is keeping oil prices higher.

On Sunday, the Iranian government said that it targeted three oil tankers using an unauthorized route through the Strait of Hormuz, as well as a number of US-linked ships, in retaliation for US attacks on Iranian tankers over the weekend.

In the opening session on Monday, the MCX Crude Oil contract expiring on September 21 is up 1.75% to near Rs. 8,730, closer to its over three-month high of Rs. 8,791.

US Inflation data in focus

This week, the major event for global markets is expected to be the US Consumer Price Index (CPI) data for August, which will be published on Friday.

Investors will closely track the data as Fed Chairman Kevin Warsh has warned of upside inflation risks several times and has stated that the central bank is committed to bringing price pressures down.

However, recent comments from board members: New York Fed Bank President John Williams and Governor Christopher Waller have signaled that recent data on inflation has been “encouraging”.

Meanwhile, traders are expected to reassess the Fed’s interest rate expectations due to stronger-than-expected Nonfarm Payrolls data for August released on Friday. The data showed that employers hired 162K fresh workers, significantly higher than 56K estimate. July’s NFP data was also revised higher to 21K from -23K.

The CME FedWatch tool shows the odds of the Fed hiking interest rates at the policy meeting next week have increased to 60% from 50% seen before the employment data release.

USD/INR Technical Analysis

In the daily chart, USD/INR trades at 94.45. The pair maintains a bearish near-term bias as price holds below the 20-day Exponential Moving Average (EMA) at 95.17.

The shift in the Relative Strength Index (14) range from the 40.00-60.00 zone to below 40.00 suggests downside momentum remains dominant but also warns that selling pressure could be stretched.

On the downside, the June low at 94.15 will be the key support level for the USD/INR pair. On the topside, the 20-day EMA at 95.15 stands as the first meaningful resistance that the pair would need to reclaim to ease the current bearish tone and open the door to a corrective rebound.

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

Indian economy FAQs

The Indian economy has averaged a growth rate of 6.13% between 2006 and 2023, which makes it one of the fastest growing in the world. India’s high growth has attracted a lot of foreign investment. This includes Foreign Direct Investment (FDI) into physical projects and Foreign Indirect Investment (FII) by foreign funds into Indian financial markets. The greater the level of investment, the higher the demand for the Rupee (INR). Fluctuations in Dollar-demand from Indian importers also impact INR.

India has to import a great deal of its Oil and gasoline so the price of Oil can have a direct impact on the Rupee. Oil is mostly traded in US Dollars (USD) on international markets so if the price of Oil rises, aggregate demand for USD increases and Indian importers have to sell more Rupees to meet that demand, which is depreciative for the Rupee.

Inflation has a complex effect on the Rupee. Ultimately it indicates an increase in money supply which reduces the Rupee’s overall value. Yet if it rises above the Reserve Bank of India’s (RBI) 4% target, the RBI will raise interest rates to bring it down by reducing credit. Higher interest rates, especially real rates (the difference between interest rates and inflation) strengthen the Rupee. They make India a more profitable place for international investors to park their money. A fall in inflation can be supportive of the Rupee. At the same time lower interest rates can have a depreciatory effect on the Rupee.

India has run a trade deficit for most of its recent history, indicating its imports outweigh its exports. Since the majority of international trade takes place in US Dollars, there are times – due to seasonal demand or order glut – where the high volume of imports leads to significant US Dollar- demand. During these periods the Rupee can weaken as it is heavily sold to meet the demand for Dollars. When markets experience increased volatility, the demand for US Dollars can also shoot up with a similarly negative effect on the Rupee.