INR regains ground as the US Dollar weakens, the RBI’s FX position and rising oil prices weigh
- USD/INR slips to 85.36 as the Indian Rupee rebounds after last week’s decline.
- India’s HSBC Manufacturing PMI was revised to 57.6 in May, signaling a mild slowdown.
- RBI’s $73B short dollar forward position raises risks, interest rate decision due Friday.
The Indian Rupee (INR) stages a mild recovery, strengthening against the US Dollar (USD) on Monday after posting a nearly 1% decline the previous week. The rebound in the INR is largely driven by a softer US Dollar as easing US Treasury yields and a cautious market tone continue to weigh on the Greenback.
At the time of writing, the USD/INR pair is trading near 85.36, hovering around the 21-day Exponential Moving Average (EMA) during the early North American session.
Meanwhile, the US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading lower on Monday amid renewed trade tensions tied to US President Donald Trump’s protectionist rhetoric. The selling pressure intensified after the ISM Manufacturing Purchasing Managers Index (PMI) came in weaker than expected, reinforcing concerns about slowing economic momentum, with the Dollar Index trading around 98.67, below its low from the previous week.
On the data front, India’s manufacturing activity cooled slightly in May, with the HSBC Manufacturing PMI slipping to 57.6 from 58.3 in April. The figure, released earlier on Monday, matched the analysts' forecast but still points to a mild slowdown in factory momentum.
The surge in global oil prices is adding another layer of complexity to the Rupee’s near-term outlook. Crude oil prices jumped over 4% on Monday following reports of Ukrainian drone strikes on Russian military airfields and OPEC+'s announcement of a 411,000 barrels per day production increase for July. As a major importer of crude, India remains highly sensitive to price swings in the oil market
Adding to the pressure, fresh concerns have emerged around the Reserve Bank of India’s (RBI) sizeable short US Dollar position. According to the central bank’s latest data, the RBI had outstanding US Dollar commitments worth approximately $73 billion as of April, based on its net short forward position — a metric reflecting the amount of US Dollars the central bank has agreed to sell in the future. Although the figure is down from a record high of $88.8 billion in February, it still underscores the scale of the RBI’s efforts to stabilize the Indian Rupee amid external headwinds.
Looking ahead, investor focus is shifting to the Reserve Bank of India’s policy meeting on Friday, where the central bank is widely expected to cut interest rates. Traders are also staying cautious ahead of the Nonfarm Payrolls (NFP) due Friday, both of which could shape the Fed’s policy outlook.
RBI FAQs
The role of the Reserve Bank of India (RBI), in its own words, is "..to maintain price stability while keeping in mind the objective of growth.” This involves maintaining the inflation rate at a stable 4% level primarily using the tool of interest rates. The RBI also maintains the exchange rate at a level that will not cause excess volatility and problems for exporters and importers, since India’s economy is heavily reliant on foreign trade, especially Oil.
The RBI formally meets at six bi-monthly meetings a year to discuss its monetary policy and, if necessary, adjust interest rates. When inflation is too high (above its 4% target), the RBI will normally raise interest rates to deter borrowing and spending, which can support the Rupee (INR). If inflation falls too far below target, the RBI might cut rates to encourage more lending, which can be negative for INR.
Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in FX markets to maintain the exchange rate within a limited range. It does this to ensure Indian importers and exporters are not exposed to unnecessary currency risk during periods of FX volatility. The RBI buys and sells Rupees in the spot market at key levels, and uses derivatives to hedge its positions.
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