USD/INR extends the rally on foreign outlows, renewed US Dollar demand
- Indian Rupee trades in negative territory in Thursday’s early European session.
- Rising US Dollar demand and foreign equity outflows weigh on the INR.
- The US Balance of Trade and weekly Initial Jobless Claims are due later on Thursday.
The Indian Rupee (INR) edges lower on Thursday. The renewed US Dollar (USD) demand from foreign banks and oil companies exert some selling pressure on the Indian currency. Additionally, foreign equity outflows and squaring of offshore non-deliverable forwards (NDF) positions ahead of the Reserve Bank of India’s (RBI) monetary policy review on Friday could also undermine the INR.
Nonetheless, concerns over US President Donald Trump's erratic tariff policy and a ballooning fiscal deficit after the House of Representatives passed a sweeping tax cut and spending bill could drag the Greenback lower and provide some support to the local currency.
Investors will keep an eye on the US Balance of Trade and the weekly Initial Jobless Claims, which will be published later on Thursday. The RBI interest rate decision will take center stage on Friday. The Indian central bank is anticipated to deliver a third straight 25 basis points (bps) rate cut at its June meeting. On the US docket, the US May employment report will be closely monitored. The US Nonfarm Payrolls (NFP) is expected to show job growth of 130K in May, while the Unemployment Rate is projected to remain steady at 4.2% in the same report period.
Indian Rupee softens ahead of the India/US key events
- According to a Reuters poll of foreign currency strategists, the Indian rupee is likely to make small gains this year, underperforming the majority of its Asian counterparts as the US Dollar retreats.
- The INR has barely made any advances against the USD this year, placing it among the worst performers in Asia. It has not received much support from reports of unexpectedly strong growth in the last quarter.
- India’s HSBC Composite Purchasing Managers Index (PMI) eased to 59.3 in May from 61.2 in April. Meanwhile, the Services PMI dropped to 58.8 in May. This reading came in lower than the previous reading and the expectation of 61.2.
- “India registered a 58.8 services PMI in May 2025, broadly in line with the steady readings from recent months. Strong international demand continued to fuel services activity, as evidenced by the new export business index’s uptick from April,” said Pranjul Bhandari, Chief India Economist at HSBC.
- The US Services PMI declined to 49.9 versus 51.6 prior, according to the Institute for Supply Management (ISM) on Wednesday. This reading came in below the market consensus of 52.0.
- US ADP private sector employment rose 37,000 in May, compared to a 60,000 increase (revised from 62,000) recorded in April, missing the market expectation of 115,000.
- Minneapolis Fed President Neel Kashkari said late Wednesday that the labour market is showing some signs of slowing down. Kashkari added that the central bank must stay in wait-and-see mode to assess how the economy responds to the uncertainty.
USD/INR resumes its upside above the key 100-day EMA
The Indian Rupee trades on a softer note on the day. The USD/INR pair resumes its upside, with the price crossing above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. Furthermore, the 14-day Relative Strength Index (RSI) stands above the midline near 57.60, suggesting bullish vibes stay in play in the near term.
The immediate resistance level for USD/INR is seen at 86.00, representing the psychological level and the high of June 4. Sustained trading above this level could pave the way to 86.71, the high of April 9, en route to 87.30, the high of March 12.
In the bearish event, the first support level is located at 85.30, the low of June 3. A break below the mentioned level could allow the downtrend to resume to 85.04, the low of May 27. The additional downside filter to watch is 84.61, the low of May 12.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
