Rupee's Struggle Below 85: Geopolitical Jitters and Market Sentiment Clash

The Indian rupee’s bid to breach the psychologically critical 85 mark against the U.S. dollar has been repeatedly foiled by geopolitical turbulence in Kashmir, underscoring how geopolitical risks can override even the most promising macroeconomic tailwinds. On April 25, 2025, the USD/INR exchange rate closed at 85.5730, after swinging between 85.06 and 85.66 intraday—a stark reflection of the market’s fragile confidence in the face of escalating India-Pakistan tensions.

The Geopolitical Catalyst: Kashmir’s Escalating Crisis

The trigger for the rupee’s struggles was a deadly militant attack on April 22, 2025, in Pahalgam, Indian-administered Kashmir, which killed 26 people, including a honeymooning Indian Navy officer and a Nepalese student. While no group claimed responsibility, Indian authorities blamed Pakistan-sponsored militants, reigniting a decades-old blame game. The fallout was immediate:

• Diplomatic Escalation: India suspended the Indus Waters Treaty (a 1960 pact regulating water-sharing) and expelled Pakistani diplomats, while Pakistan closed its airspace to Indian flights and demanded evidence of Indian claims.
• Market Impact: The rupee plunged to 85.6550 on April 25, its lowest since mid-April, as investors fled risk assets. The Nifty 50 Index dropped over 1%, underperforming Asian markets buoyed by U.S. optimism.

Market Reactions: Sell-Offs and Technical Resistance

The attack amplified existing vulnerabilities in the rupee:

• Equity and Bond Sell-Offs: The Nifty 50’s decline exacerbated downward pressure on the rupee, as foreign institutional investors (FIIs) paused their inflows.
• Bond Market Stress: India’s 10-year government bond yield rose 4 basis points to 6.88%, reflecting a flight to safer assets.
• Technical Barriers: The USD/INR pair remained pinned above its 100-day EMA (85.82), with resistance at 86.45. Analysts highlighted a descending trend channel, warning that a sustained break below 84.85 could open a path to 84.08—the November 2024 low.

Macroeconomic Crosscurrents: A Fragile Equilibrium

While geopolitical risks dominated sentiment, underlying economic factors provided mixed signals:

• RBI Rate Cuts: The Reserve Bank of India (RBI) was expected to cut rates to 5.50% by Q3 2025, from 5.75%, to support growth. India’s GDP was projected to expand 6.3% in FY2025–26, though tariff-related business sentiment remained shaky (60% of economists cited negative impacts).
• Crude Oil Pressures: Reliance on oil imports kept the rupee vulnerable. A $10/barrel rise in crude prices could widen India’s trade deficit by $5 billion, worsening the currency’s outlook.
• Trade Talks: A 90-day pause on U.S. tariffs (reduced to 10% from 26%) offered temporary relief, but the U.S. Treasury’s hint at a bilateral trade deal with India added uncertainty.

The Bottom Line: Geopolitics Outweighing Fundamentals

The rupee’s inability to break below 85 reflects a stark reality: geopolitical risks have become the dominant variable for INR/USD traders. Even positive developments—such as FII inflows or U.S. trade optimism—were outweighed by fears of further escalation in Kashmir.

• Near-Term Outlook: The 84.85–85.00 zone offers critical support, but a sustained breach below this could test 84.22 (November 2024 lows). Conversely, a move above 86.45 would signal a deeper bearish trend.
• Long-Term Risks: The Indus Waters Treaty suspension and military posturing highlight systemic risks. If tensions escalate into military conflict, the rupee could face a rout, with the 86–87 range quickly in play.

Conclusion: A Currency Held Hostage to Geopolitics

The rupee’s struggle below 85 is a microcosm of India’s broader challenges. While the economy’s fundamentals—6.3% GDP growth, structural reforms, and FII inflows—remain robust, geopolitical instability has become the currency’s Achilles’ heel.

• Data-Driven Reality: The April 25 close at 85.5730 sits 1.3% above the year’s low (84.997) but 2.6% below the 2025 high (88.05), illustrating its volatility.
• Investment Implications: Traders should monitor Nifty performance, the Indus Treaty’s status, and crude oil prices. A de-escalation could spark a rebound below 85, but the path to stability remains fraught with risks.

In short, the rupee’s fate is now inextricably tied to the whims of a region where one bullet can outweigh billions in economic data.