USD/INR edges higher as India’s soft retail inflation data boosts dovish RBI bets
- The Indian Rupee faces pressure against the US Dollar as the RBI is expected to cut interest rates in December.
- FIIs have turned out to be net sellers on all trading days so far this week.
- Fed’s Collins supports no adjustment in current interest rates.
The Indian Rupee (INR) ticks lower against the US Dollar (USD) at open on Thursday. The USD/INR pair edges up to near 88.50 as the Indian Rupee is expected to face significant pressure due to growing expectations that the Reserve Bank of India (RBI) could loosen monetary policy conditions in the December policy meeting.
RBI dovish speculation has intensified following the release of the retail Consumer Price Index (CPI) data for October, released on Wednesday. The report showed that retail inflation decelerated at a faster-than-expected pace to 0.25% on an annualized basis, driven by soft food prices and tax cuts in consumer goods announced in the third quarter of the year. This is the second straight month when the inflation data has come below the RBI’s tolerance range of 2%-6%.
"To prevent the economy from slipping into sluggish and weak economic growth, the RBI may go for a 25-50 basis points cut in repo rate in its December 2025 monetary policy," said Devendra Pant, chief economist at India Ratings and Research, Reuters reported.
Lower interest rates by the RBI bode poorly for the Indian Rupee.
Meanwhile, the continuous outflow of foreign funds from the Indian stock market is also keeping the Indian Rupee under pressure. Foreign Institutional Investors (FIIs) have turned out to be net sellers in all three trading days so far this week. On Wednesday, FIIs pared stake worth Rs. 1,750.03 crore.
Going forward, investors will focus on the Wholesale Price Index (WPI) Inflation data for October, which will be released on Friday.
Daily digest market movers: Indian Rupee underperforms US Dollar
- The Indian Rupee weakens against the US Dollar, even as the latter trades cautiously against its major currency peers. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat slightly above its 10-day low of 99.30.
- The Greenback has been under pressure, and traders seem confident that the Federal Reserve (Fed) will cut interest rates again in the policy meeting in December. According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) to 3.50%-3.75% in the December meeting has increased to 67% from 62% seen a week ago.
- Fed dovish bets have slightly accelerated following the release of ADP Employment Change four-week average data, which showed that private employers laid off 11.25K workers each week through late October.
- Contrary to market expectations, a few Federal Open Market Committee (FOMC) members have been arguing in favor of holding interest rates at their current levels for some time. On Wednesday, Boston Federal Reserve President Susan Collins stated that recent interest rate cuts have raised the bar of further monetary policy easing very high, citing upside inflation risks.
- "It will likely be appropriate to keep policy rates at the current level for some time to balance the inflation and employment risks in this highly uncertain environment," Collins said at the Greater Boston Chamber of Commerce, Reuters reported.
- Meanwhile, the reopening of the US government, following the historically longest shutdown, has been ordered as President Donald Trump has signed the federal funding bill. The US government reopening will be followed by key economic releases, which were halted due to the shutdown.
Technical Analysis: USD/INR aims to revisit all-time high above 89.00
USD/INR rises to near 88.85 at open on Thursday. The near-term trend of the pair remains bullish as it stays above the 20-day Exponential Moving Average (EMA), which trades around 88.66.
The 14-day Relative Strength Index (RSI) strives to return above 60.00. A fresh bullish momentum would emerge if the RSI (14) manages to do so.
Looking down, the August 21 low of 87.07 will act as key support for the pair. On the upside, the all-time high of 89.12 will be a key barrier.
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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