USD/INR gains momentum on RBI rate cut bets
- Indian Rupee weakens in Monday’s Asian session.
- Higher oil prices and RBI rate cut bets weigh on the INR, but stronger GDP data from India might cap its downside.
- Traders await the US May ISM Manufacturing PMI data later on Monday ahead of the RBI rate decision.
The Indian Rupee (INR) extends the decline on Monday. A rise in crude oil prices drags the Indian currency lower. It’s worth noting that India is the world's third-largest oil consumer, and higher crude oil prices tend to have a negative impact on the INR value. Additionally, the rising expectation that the Reserve Bank of India (RBI) will deliver a third straight 25 basis points (bps) rate cut to boost growth might cap the INR’s upside in the near term.
Nonetheless, the upbeat India’s Q1 Gross Domestic Product (GDP) report could boost equities and lift the local currency both via portfolio inflows and sentiment. Looking ahead, traders will keep an eye on the US May ISM Manufacturing Purchasing Managers' Index (PMI) report, which is due later on Monday. On Friday, the RBI interest rate decision and the US Nonfarm Payrolls (NFP) data will be in the spotlight.
Traders will also closely monitor a trade negotiation between the United States (US) and India, which is officially expected to conclude by fall. US President Donald Trump slapped tariffs of up to 27% on Indian goods on April 2 and a 90-day tariff pause on these ends on July 9.
Indian Rupee softens despite upbeat India’s GDP report
- India's economy grew by 7.4% YoY in the first quarter of 2025, up from 6.2% the previous quarter and significantly beating analyst expectations of 6.7%.
- India remains the world's fastest-growing major economy, though growth has sharply declined from the 9.2% high recorded in the financial year 2023-24.
- Net Foreign Direct Investment (FDI) into India declined to $0.35 billion in 2024-25, the lowest level in two decades, as rising outbound foreign investment and repatriation by Indian enterprises offset the inbound investment.
- The Indian rupee is emerging as Asia’s worst performer this quarter and may continue to lag peers as the RBI aims to avert a depletion in its foreign exchange reserves, according to analysts.
- India’s foreign exchange reserves stood at about $693 billion as of May 23, down from the all-time high of $705 billion reached in September last year.
- The US Personal Consumption Expenditures (PCE) Price Index rose 2.1% year on year in April, compared to 2.3% in March, the US Bureau of Economic Analysis showed on Friday. This figure came in below the market consensus of 2.2%.
USD/INR keeps the bearish vibe in the longer term
The Indian Rupee trades in negative territory for the fifth consecutive day. However, the USD/INR pair remains capped below the key 100-day Exponential Moving Average (EMA) on the daily timeframe, indicating that the path of least resistance is to the downside. In the near term, further consolidation cannot be ruled out, with the 14-day Relative Strength Index (RSI) hovering around the midline.
USD/INR seems to be finding initial support at 84.78, the low of May 26. A break below the mentioned level could set off a drop toward 84.61, the low of May 12. The next bearish target to watch is 84.00, the psychological level and the lower limit of the trend channel.
On the other hand, the key resistance level for the pair emerges in the 85.55-85.65 zone, representing the 100-day EMA and the upper boundary of the trend channel. Any follow-through buying could see a rally to 86.10, the high of May 22.
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.
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