MC EXPLAINER What's holding rupee at 85-86 levels against US dollar?

In the last few days, geopolitical situation across the global was reduced with Israel and Iran ceasefire agreement, and softer stance on the US tariffs.

Aditi Gupta, Economist at Bank of Baroda said cease-fire deal between Iran and Israel has contributed to an improvement in global risk-sentiment. Additionally, US-China trade talks have progressed well, further bolstering investor sentiments.

All these developments have helped Indian currency to appreciate, but with the moderate pace.

Dollar index trading multi-year low

Dollar index, which measures the greenback's strength against a basket of six major currencies, initially fell after Moody’s announced its downgrade of the US credit rating, citing fiscal concerns.

Post this, it started falling and touched a multi-year on renewed concerns of US President Trump's criticism of Federal Reserve chair Jerome Powell and plans of his early replacement. The decline in dollar index has provided some relief to the local currency.

The dollar index, which was trading around 100 on May 20, 2025, have started falling and reached a multi-year low of 96.734 on July 1, 2025. On year-to-date basis, dollar index is down by 10.8 percent, as per Bloomberg data.

“The appreciation trend in Indian rupee reflects dollar weakness and IPO related inflows,” said Gaura Sengupta, Economist at IDFC First Bank.

Why rupee not sharply reacting to dollar index movement?

Economists are of the that the sharp movement in the dollar index is not helping much to the local currency as the inflows in debt remained muted.

“The reason why Indian rupee is not benefitting from profound dollar weakness is due to capital inflows remaining weak. balance of payments in Q1FY26 remains negative,” Sengupta said.

Foreign investment in India’s debt market has slowed down in recent months due to global uncertainties like tariff hikes and economic slowdown, as well as domestic factors such as falling interest rates that reduce the return gap between Indian and US bonds.

In June, foreign portfolio investors (FPIs) pulled out over $1.06 billion from Indian debt, after a sharp outflow of $3.03 billion in April.

What range is expected for rupee going ahead?

Experts said that the domestic currency is likely to trade in the range of 85.25 to 86.25 against the US dollar in next few months as geopolitical tensions wanes. The currency may witness some appreciation bias.

“The range is expected at 85.25-86.25/USD in the coming months, with a slight appreciating bias. This assumes that the US government decides to extend the tariff deadline further, and that the Iran-Israel conflict remains contained,” Aditi Gupta said.