Dollar index Vs Rupee

The impact on USDINR pair is directional proportional to what Dollar Index does..

Dollar Index is the measure of USD’s strength or weakness..

Dollar Index Crossed 107 at the beginning of Oct2023, it had a very clear downside all the way to 102..This indicated weakness in USD in comparison to other currencies against which its pegged in this index (they are pegged against six other currencies EUR, GBP, JPN, CAD, SEK and CHF). 

While the USD lost its value to 102 levels, this normally should have translated to USDINR pair. However, during the same period we noticed that USD did not lose against Rupee. Could be that Rupees lost more than what Dollar lost resulting in the pair remaining sideways all along….

Now, Dollar Index seems to have ended its downside at 61.8% FIB levels and is clearly gaining in strength in the last and current week. This should have ideally translated to USDINR pair also gaining in price. But, we are not seeing that so far in the last one week. Logically, this could only mean that Rupee has not lost against USD for now which is holding the price of the USDINR paid in the range. The underlying macro aspects of Rupee now seems to be a bit more complex then what it was earlier given Rupee in itself is a legal tender globally and in our oil trade which we do with many countries. This aspect may need some more areas to be analysed on how Rupee behaves wrt India’s economic and trade factors with USD. Clearly it appears the gain or loss of USD is not a loss or gain of Rupee now.

Now, let us try to reason out why in recent times, the INR has not appreciated against the USD despite the falling dollar index. During the US Treasury bond crisis, a large amount of Foreign Institutional Investors (FIIs) exited the Indian markets to invest in US treasury bonds. Additionally, the US Federal Reserve hiked interest rates to reduce inflation and get bond yields under control. This led to the stabilization of the downside of the dollar index. However, the recovery recovered the risk appetite of investors who then went back to their investments in the countries listed against the USD in the dollar index, causing the USD to depreciate. Furthermore, the Feds have seen a decline in inflation due to the increased interest rates, and therefore they have released statements saying that they will not increase rates higher if this is the case. This means that investors no longer have high returns in the US, and they will choose to go to other countries.

The Reserve Bank of India (RBI) has been making efforts to internationalize the rupee by opening rupee trade vostro accounts with 18 different countries. This is all to help balance India’s big trade deficit. India imports way more than it exports, and this is because it does not use a lot of its potential. When this happens, India needs more forex to pay its supplying countries in their currency, which means it has to end up betting against itself in the exchange market. Now, this internationalization is in an effort to stop betting against itself and also set off its deficits and surpluses against different trading partner countries against each other, somewhat like an accounting contra entry. This allows India to avoid incurring a greater deficit in trying to pay back one country in a currency of its own.

What does this mean for India? India will see greater strength in INR and the rupee will appreciate. 

Given this situation, technical charts could come in very handy. For now, USDINR pair is in a very tight range. We need this range to be broken out for any meaningful trade in USDINR pair. While its holding on to 20SMA on daily and can be argued that the price cannot remain at mean for long, now this long has really been too long in USDINR. Price has to now deviate from 20SMA. May be it will be good to draw a horizontal channel and wait for the price to cross on either side to get on to a trade.


Jitendra Bangalore Gopalakrishna

Credits : Economic Times,

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