The dollar extended its losses against the Indian rupee on Tuesday (November 3), marking its third consecutive day of decline, and is currently trading around 94.75. The Indian rupee strengthened as hopes for a diplomatic solution between the US and Iran improved, while oil prices remained under pressure.

The direct driver of the rupee's third consecutive rise: lower oil prices improved terms of trade.

The core logic behind the recent strength of the Indian rupee lies in oil prices. As an economy heavily reliant on oil imports to meet its energy needs, India's terms of trade are closely tied to oil prices. The nearly 7.5% drop in MCX crude oil prices from their recent multi-month highs has directly alleviated India's import cost pressures, providing the rupee with the most direct fundamental support. This transmission chain is clearly discernible: lower oil prices lead to improved import balances, easing trade deficit pressures and thus supporting the rupee. The three consecutive days of gains are a testament to this chain's continuous performance on the market.

The Crowding Out and Residual Effects of Risk Premiums: Diplomatic Messages Reshape the Tone, But Are Difficult to Completely Eliminate

According to TD Securities, recent news indicating that US President Trump is willing to give diplomacy more time and "hinted that attacks around the midterm elections may not happen immediately" has "squeezed some of the geopolitical risk premium out of crude oil and petroleum products." Strategists added that "with high flows and a large portion of recent gains attributed to risk premiums, this news will have an increasingly significant impact on the market," as positioning and sentiment are adjusting to geopolitical narratives. However, TD Securities warned that "news alone is unlikely to eliminate all risk premiums." The bank added, "As long as there is no concrete conclusion to the conflict and tanker and Houthi attacks continue, we do not expect risk premiums to completely disappear based solely on diplomatic news," emphasizing that ongoing geopolitical threats continue to support pricing. This assessment implies that the downside for oil prices is limited by the remaining portion of the risk premium, and the rupee's gains are therefore also capped.

Midterm Elections: Democratic victory in the House of Representatives is expected, but the Senate remains a more uncertain prospect.

According to strategists at a well-known institution, "The US midterm elections will be held on Tuesday," and "Democrats are widely expected to win the House of Representatives." They added that "Senate control is closer, but the tide is in the Democrats' favor," as "Democrats need a net gain of four seats to secure a Senate majority"—a goal "within reach" as Republicans need to defend six of the seven swing seats. The institution noted that the betting market "biases a Democratic sweep," with Polymarket and Kalshi "giving it a probability of about 70%." In their view, this "means that if Democrats win both houses, the initial market reaction will be relatively mild," while "a Republican hold on the Senate would be a bigger surprise and could trigger more market volatility."

Implications for the rupee: The dual impact of oil prices and election results

For the rupee, oil price movements and election results will jointly influence its short-term direction through risk appetite and the dollar's trajectory. Regarding oil prices, if diplomatic progress further reduces risk premiums, the rupee's terms of trade will continue to improve; however, if repeated conflicts lead to premium recouping, the rupee's gains will be limited. As for the election, the expectation of a Democratic sweep has already been partially priced in; if this occurs, the market reaction may be relatively mild. If the Republicans retain control of the Senate, the dollar may see safe-haven buying due to policy uncertainty, thus putting pressure on the rupee. The interplay of these two transmission paths will determine the rupee's direction after its three-day rally.

in conclusion

The US dollar is poised for a third consecutive decline against the Indian rupee, primarily driven by escalating diplomatic hopes between the US and Iran, which has partially eroded the risk premium in oil prices—MCX crude oil has fallen nearly 7.5% from its recent high, directly improving trade terms for India, a major oil importer. However, analysts caution that news alone cannot completely eliminate the risk premium. With no concrete resolution to the conflict and frequent tanker and Houthi attacks, geopolitical threats continue to support oil prices. The next key trigger is Tuesday's US midterm elections: the expectation of a Democratic victory in the House of Representatives is relatively clear, while the Senate remains more uncertain, with betting markets pricing in a roughly 70% probability of a Democratic sweep—if this occurs, the initial market reaction may be relatively mild; if the Republicans retain control of the Senate, it could trigger greater volatility. For the rupee, the direction of oil prices and the election results will jointly influence its short-term trajectory through risk appetite and the path of the US dollar. (USD/INR daily chart, source: FX678) At 16:01 Beijing time, the USD/INR exchange rate was 94.75/76.