As dollar strengthens and the 86-mark is breached, can rupee regain its grip?

After holding its ground for a few sessions, the rupee finally buckled under global pressure, closing at 86.16, its lowest in three weeks. "The breach of the crucial 86-level is more than a technical move; it signals a shift in market mood," said Amit Pabari, MD of Cr Forex.

The dollar’s latest surge came not from policy action, but from political theatre. U.S. President Donald Trump publicly denied reports about removing Federal Reserve chair Jerome Powell, after days of speculation. “While that may have eased immediate concerns, his ongoing frustration with the Fed’s reluctance to cut interest rates kept traders on edge," added Pabari.

Trade talks on the horizon

Amid the gloom, a glimmer of relief has appeared after Trump’s upbeat tone around a potential trade deal with India. A bilateral pact could pave the way for greater market access for U.S. companies, while also improving investor sentiment around India.

"For the rupee, such a breakthrough—however temporary—could act as a floor and restore some stability. But until concrete progress is visible, markets will treat it as just another headline," said Pabari.

The dollar index surge

The dollar index has found some support in recent days as U.S. economic data continues to show resilience. For instance, retail sales have risen more than expected and initial jobless claims have declined. Global risk aversion has also picked up following the announcement of higher U.S. tariffs, lending some support to the dollar and weighing on currencies like the rupee.

"While the dollar index has been on the rise for the past week, it remains weak on a calendar year-to-date basis, down about 9.3%. Trade policy uncertainty and concerns over the U.S. fiscal outlook are weighing on sentiment. Expected Fed rate cuts in the second half of 2025 should also keep the dollar soft. In this backdrop, several currencies have appreciated against the dollar, including the yuan, which has strengthened by 1.7% so far this year,” said Rajani Sinha, chief economist, CareEdge Ratings.

“However, the rupee has seen some depreciation, down about 0.6% CYTD. On a REER basis, the rupee continues to maintain export competitiveness,” she added.

Rupee outlook

The rupee remains under pressure, with the broader trend still tilted toward depreciation amid strong U.S. data and a cautious Fed. “With the dollar-rupee pair having breached the key 86-mark, the next leg could extend toward 86.50-86.80, while 85.60-85.70 is expected to act as immediate support," said Pabari.

Sinha expects the rupee to trade in the 85-87 range by the end of FY26. “This reflects our view of continued dollar softness and the expectation that any sharp USD/CNY depreciation is unlikely for now. India’s current account deficit is expected to remain manageable at around 0.9% of GDP in FY26, supported by resilient services exports and lower crude oil prices, which are likely to stay in the USD 60-70 per barrel range through FY26, aiding the trade balance."

That said, she warned that FPI flows may stay volatile amidst global uncertainty and U.S. policy risks, with the upcoming trade deal with India being an important factor to watch. “So far in CY25, net FPI outflows (equity plus debt) stand at around $6.5 billion (as of July 17). Nonetheless, RBI interventions should help contain any sharp moves in the currency," she added.