The Indian rupee experienced a marginal strengthening against the U.S. dollar, buoyed by a dip in U.S. Treasury yields. This movement occurred amidst concerns regarding the potential economic repercussions of international trade disputes, which generally put downward pressure on the U.S. dollar, crude oil prices, and U.S. Treasury yields.
On July 22, 2025, the rupee was recorded at 86.2650 per U.S. dollar at approximately 11:10 a.m. IST, a slight increase from its previous closing value of 86.2925. Simultaneously, the dollar index remained steady at 97.9 during Asian trading hours, following a 0.6% decrease on the previous day. This decline mirrored the decrease in U.S. Treasury yields, with the 10-year yield reaching a near two-week low of approximately 4.35%.
A decrease in short-term U.S. Treasury yields also contributed to an increase in far-tenor dollar-rupee forward premiums. The 1-year dollar rupee implied yield reached a two-week high of 2.03%, while reduced rupee liquidity in the banking system helped to elevate near-tenor dollar-rupee swap rates.
The decline in U.S. Treasury yields is influenced by various factors, including concerns over the U.S. budget deficit and reactions to tax bills. These factors can impact global investor confidence and subsequently affect bond markets, including India's. Weaker economic data or expectations of slower economic growth in the U.S. can also lead to lower Treasury yields, as investors seek the safety of government bonds. Conversely, strong economic data and rising inflation expectations can push yields higher.
The relationship between U.S. Treasury yields and the Indian rupee is multifaceted. A decrease in U.S. Treasury yields can make investments in emerging markets, such as India, more attractive due to the potential for higher returns. This can lead to increased foreign investment in Indian debt and equity markets, which in turn increases demand for the rupee and puts upward pressure on its value.
Conversely, rising U.S. Treasury yields can have the opposite effect. As U.S. bond yields increase, they become more attractive to investors, potentially leading to capital outflows from emerging markets like India. This can reduce demand for the rupee and cause it to depreciate.
Several factors beyond U.S. Treasury yields also influence the value of the Indian rupee. These include India's trade balance, current account deficit, inflation rate, and the Reserve Bank of India's (RBI) monetary policy. Global events, such as geopolitical tensions and fluctuations in crude oil prices, can also impact the rupee's value. The Indian government, through the central bank, influences the circulation and pegging of the rupee. In the past, the Indian rupee was pegged to the US Dollar and the British Pound, but now its value is determined by various exchange rate factors, including the country's GDP growth rate, inflation rate, and interest rates.
In early 2025, a notable compression occurred between the U.S. and India 10-year government bond yields, falling below 2% for the first time. This compression, influenced by factors such as U.S. fiscal deficits, grants the Reserve Bank of India greater independence in monetary policy.
The RBI plays a crucial role in managing the rupee's volatility. It uses various tools, including foreign exchange interventions and interest rate adjustments, to stabilize the currency and maintain financial stability. A strong monetary policy in India is expected to cushion market disruptions and keep Indian bonds appealing to investors.
