The Indian Rupee (INR) weakens against the US Dollar (USD) and falls to near 86.00 during Asian trading hours on Friday. The USD/INR pair strengthens as the Reserve Bank of India (RBI) has unexpectedly cut its Repo rate by 50 basis points (bps) to 5.5%.
Economists had anticipated that the RBI would cut its repo rate by 25 bps for the third time in a row. An unexpected jumbo rate cut is expected to widen the policy divergence with other central banks, potentially keeping the INR on the backfoot in the near-to-medium term.
RBI Governor Sanjay Malhotra has stated that a jumbo rate cut was needed to boost economic growth. “Front-loading rate cuts to support growth were felt necessary,” Malhotra said. The RBI has revised inflation guidance for FY26 to 3.7% from 4.0% projected earlier, but has expressed concerns that the last leg of inflation appears to be stickier. “Last mile of inflation turning out a little more protractive,” Malhotra said.
Meanwhile, the RBI has changed its policy stance from “accommodative” to “neutral”, which suggests that the next monetary policy decision could be on either side.
The Indian Rupee slides to near 86.00 against the US Dollar on Friday. The near-term trend of the pair is already bullish as it holds the 20-day Exponential Moving Average (EMA), which trades around 85.47.
The 14-day Relative Strength Index (RSI) wobbles around 60.00. A fresh bullish momentum would come into action if the RSI breaks above that level.
Looking up, the pair could revisit an over 11-week high around 86.70 after breaking above the May 22 high of 86.10. On the downside, the June 3 low of 85.30 is a key support level for the major. A downside break below the same could expose it to the May 26 low of 84.78.
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.