USD/INR extends the rally after Trump's latest tariffs threat
- The Indian Rupee remains under selling pressure in Tuesday’s Asian session.
- Escalating global trade tensions weigh on the INR.
- Investors brace for the RBI interest rate decision on Wednesday.
The Indian Rupee (INR) declines on Tuesday, erasing all its gains of 2025. Fears over global trade tensions escalated after China implemented retaliatory tariffs on US goods. The heightened uncertainty has triggered risk-off sentiment, leading to outflows from emerging markets, including India. This, in turn, exerts some selling pressure on the Indian currency. Additionally, the Reserve Bank of India (RBI) could tolerate a sharper depreciation of the INR if China lets the Chinese Yuan weaken to cushion the impact of US tariffs, multiple sources aware of the central bank's thinking said.
On the other hand, a broadly weaker US Dollar (USD) due to the concerns over the potential recession in the United States might help limit the local currency’s losses. The RBI interest rate decision will be in the spotlight later on Friday. The Indian central bank is expected to cut key interest rates by up to 25 basis points (bps) on Wednesday, with lower inflation supporting an accommodative monetary policy stance. The attention will shift to the US Consumer Price Index (CPI) inflation report for March, which is due later on Thursday.
Indian Rupee remains fragile amid Trump’s tariff fallout
- "Bond yields slipped further after the RBI surprised by announcing another OMO for April, signaling a strong preference for surplus liquidity to aid transmission. We look for a 25bp cut in the repo rate to 6% and a change in stance to accommodative at the April meeting, tapping into the wide real rate cushion," said Radhika Rao, executive director and senior economist at DBS Bank.
- The markets have priced in a nearly 65% chance of a Fed cut in May, and futures now point to about 100 basis points (bps) worth of rate reductions by December, according to the CME FedWatch tool.
- Chicago Fed President Austan Goolsbee said late Monday that significant tariff retaliation could boost inflation, adding that a global trade war eruption may lead to a consumer behavior shift.
- Fed Governor Adriana Kugler noted that some of the recent rise in goods and market-services inflation may be "anticipatory" of the effect of the Trump administration's tariffs. Kugler further stated that the Fed's focus should be on keeping inflation in check, per Reuters.
USD/INR bulls seek to extend upside correction above the 100-day EMA
The Indian Rupee remains weak on the day. According to the daily chart, the USD/INR pair is set to resume its uptrend, with the price crossing above the key 100-day Exponential Moving Average (EMA). The pair could resume its upside journey if the price decisively closes above this level.
The first upside barrier for USD/INR emerges at 85.88, the 100-day EMA. Any follow-through buying above the mentioned level could see a rally to 86.48, the low of February 21, en route to 87.00, the round mark.
The initial support level for the pair is seen at 85.20, the low of April 3. Sustained bearish pressure below this level could keep pulling USD/INR down to the next target at 85.00 psychological level, followed by 84.84, the low of December 19.
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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