USD/INR retreats from record high amid likely RBI intervention
- The Indian Rupee rebounds in Monday’s early European session.
- US Dollar demand, sustained portfolio outflows, and rising global uncertainty continue to undermine the INR.
- RBI intervention might cap the downside for the local currency.
The Indian Rupee (INR) recovers some ground on Monday after reachign a fresh all-time low in early trading. USD sales by state-run banks, though most likely on behalf of the Reserve Bank of India (RBI), might help limit the local currency’s losses.
On the other hand, sustained foreign portfolio investors (FPI) outflows, the concern about an economic slowdown in India, and the uncertainty of US President Donald Trump’s tariff policies contribute to the INR's downside. In the absence of the top-tier economic data releases from the US and India on Monday, the USD/INR pair will be influenced by the USD.
Indian Rupee recovers amid multiple headwinds
- State-run banks kept offering USD/INR at "lower and lower" levels, most likely on behalf of RBI, a trader said.
- RBI also stepped in to support the lNR before the local spot market opened; USD/INR touched record high of 87.95 in early trading
- Mild profit-taking by USD/INR longs, exporter activity also contributed to pegging back USD/INR, traders noted.
- The Rupee closes at 87.4250 on Friday, down roughly 1% for the week, the largest weekly fall since December 2022.
- The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) decided to cut the policy repo rate by 25 basis points (bps) to 6.25% for the first time in nearly five years.
- "Going by Governor Sanjay Malhotra’s first policy, the RBI has adopted a more flexible approach, allowing the rupee to depreciate largely in line with global trends except for a few interventions that were seen over the past few days," said Foram Chheda, Technical Research Analyst.
- RBI Governor Sanjay Malhotra said the central bank was keeping its policy stance "neutral," which would open more space to support growth, signaling further rate cuts.
- The RBI forecasts headline inflation for FY25 at 4.8%, while the projection for FY26 remains unchanged at 4.2%.
- The Indian central bank estimates real GDP growth for the next year to be at about 6.7% for the first quarter (Q1), 6.7% for Q2, 7% for Q3, and 6.5% for Q4.
- US President Donald Trump said on Friday he plans to announce reciprocal tariffs on many countries by Monday or Tuesday, to take effect almost immediately, per Reuters.
- The US Nonfarm Payrolls (NFP) rose by 143K in January, compared to the 307K increase (revised from 256,000) seen in December, according to the US Bureau of Labor Statistics (BLS) on Friday. This figure came in below the market expectation of 170K.
- The Unemployment Rate ticked lower to 4% in January from 4.1% in December. The Average Hourly Earnings climbed 4.1% YoY in January, surpassing the market expectation of 3.8%.
USD/INR maintains a constructive view, overbought RSI warrants caution for bulls
The Indian Rupee trades on a positive note on the day. The USD/INR pair paints a positive picture on the daily chart, characterized by the price holding above the key 100-day Exponential Moving Average (EMA).
Nonetheless, the overbought 14-day Relative Strength Index (RSI) beyond the 70.00 mark warrants caution for bullish traders, potentially signaling a temporary weakness or further consolidation in the near term.
An all-time high of 87.62 acts as an immediate resistance level for USD/INR. Bullish candlesticks and buying pressure above this level might attract bulls aiming for the 88.00 psychological level.
On the other hand, the first downside target to watch is the 87.05-87.00 regions, representing the low of February 5 and the round mark. Consistent trading below the mentioned level, the bears could take control and drag the pair down to 86.51, the low of February 3.
Indian economy FAQs
The Indian economy has averaged a growth rate of 6.13% between 2006 and 2023, which makes it one of the fastest growing in the world. India’s high growth has attracted a lot of foreign investment. This includes Foreign Direct Investment (FDI) into physical projects and Foreign Indirect Investment (FII) by foreign funds into Indian financial markets. The greater the level of investment, the higher the demand for the Rupee (INR). Fluctuations in Dollar-demand from Indian importers also impact INR.
India has to import a great deal of its Oil and gasoline so the price of Oil can have a direct impact on the Rupee. Oil is mostly traded in US Dollars (USD) on international markets so if the price of Oil rises, aggregate demand for USD increases and Indian importers have to sell more Rupees to meet that demand, which is depreciative for the Rupee.
Inflation has a complex effect on the Rupee. Ultimately it indicates an increase in money supply which reduces the Rupee’s overall value. Yet if it rises above the Reserve Bank of India’s (RBI) 4% target, the RBI will raise interest rates to bring it down by reducing credit. Higher interest rates, especially real rates (the difference between interest rates and inflation) strengthen the Rupee. They make India a more profitable place for international investors to park their money. A fall in inflation can be supportive of the Rupee. At the same time lower interest rates can have a depreciatory effect on the Rupee.
India has run a trade deficit for most of its recent history, indicating its imports outweigh its exports. Since the majority of international trade takes place in US Dollars, there are times – due to seasonal demand or order glut – where the high volume of imports leads to significant US Dollar- demand. During these periods the Rupee can weaken as it is heavily sold to meet the demand for Dollars. When markets experience increased volatility, the demand for US Dollars can also shoot up with a similarly negative effect on the Rupee.
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.
