USD/INR depreciates toward 83.00, Indian markets closed due to general election

USD/INR edges lower due to improved risk appetite, trading around 83.20 during the early European trading hours on Monday. The subdued US Dollar (USD) has exerted downward pressure on the pair. This weakness in the Greenback is attributed to softer US consumer inflation data for April, which has fueled speculation about potential rate cuts by the Federal Reserve (Fed) in 2024.

According to the CME FedWatch Tool, the likelihood of the Federal Reserve delivering a 25 basis-point rate cut in September has slightly increased to 49.0%, up from 48.6% a week ago. This potential easing of monetary policy by the central bank could undermine the US Dollar and weaken the USD/INR pair.

However, the Fed remains cautious about inflation and the possibility of rate adjustments this year. On Friday, Federal Reserve Board of Governors member Michelle Bowman made headlines by noting that the progress on inflation might not be as steady as many had hoped. Bowman indicated that the decline in inflation observed in the latter half of last year was temporary and that there has been no further progress on inflation this year.

In India, markets are closed as voting is held in general elections in the financial capital Mumbai, and other states on Monday. This leaves limited room for the Reserve Bank of India (RBI) to intervene in currency markets to influence the Indian National Rupee (INR).

A resilient Indian economy and hawkish expectations for the Reserve Bank of India (RBI) have helped mitigate a sharper downturn of INR. In its latest meeting, RBI highlighted that higher food prices could drive inflation higher, necessitating a prolonged period of elevated interest rates.

(This story was corrected on May 20 at 08:00 GMT to say, in the second paragraph, that the central bank could undermine the US Dollar and weaken the USD/INR pair, not the NZD/USD pair)