The Indian Rupee (INR) continues to face pressure as global risk aversion dominates market sentiment, fueled by tariff threats from former US President Donald Trump. Despite the challenges, the Reserve Bank of India (RBI) is likely to intervene in the foreign exchange market to manage liquidity and curb steep INR depreciation, which may limit further upside for the USD/INR pair.
Factors Driving USD/INR Movements
The USD/INR pair’s recent rally can be attributed to a robust US Dollar (USD) driven by strong macroeconomic data and geopolitical tensions. Asian currencies, including the INR, remain subdued as the offshore Chinese Yuan (CNH) weakens. This decline in the Yuan follows statements from a senior adviser to US President-elect Donald Trump, accusing China of currency manipulation. These remarks have unsettled markets and intensified the bearish sentiment across emerging market currencies.
Adding to the INR’s woes, the appointment of bureaucrat Sanjay Malhotra as the next RBI Governor has raised expectations of a dovish monetary policy stance. India’s retail inflation eased to 5.48% in November, down from October’s 14-month high of 6.21%, primarily due to falling food prices. This moderation in inflation has strengthened the case for an interest rate cut in the RBI’s February policy review, further pressuring the rupee.
Indian Markets Reflect Global Sentiment
Indian benchmark indices, BSE Sensex and Nifty 50, opened lower, mirroring Wall Street’s overnight declines. Investors remain cautious ahead of the Federal Reserve’s Federal Open Market Committee (FOMC) meeting next week, where a 25 basis point rate cut is widely anticipated.
Foreign Institutional Investors (FIIs) continue to offload Indian equities, with net sales amounting to ₹3,560.01 crore on December 12. Meanwhile, Domestic Institutional Investors (DIIs) stepped in with net purchases worth ₹2,646.65 crore, helping stabilize the markets.
Global Economic Indicators Support USD Strength
The US economic data further bolsters the USD’s dominance. On Thursday, the Producer Price Index (PPI) recorded its largest monthly gain since June, rising by 0.4% in November. The Consumer Price Index (CPI) followed suit, with the headline inflation rate climbing to 2.7% year-over-year. Core inflation, excluding volatile food and energy prices, also remained elevated at 3.3% YoY. These figures reinforce the Federal Reserve’s commitment to a cautious monetary easing strategy, lending strength to the USD.
S&P Outlook and Economic Growth Projections for India
On the domestic front, S&P Global Ratings projects a strong growth trajectory for India, estimating 6.8% GDP growth in FY25 and 6.9% in FY26. This growth is underpinned by robust urban consumption, a steady expansion in the services sector, and continued investment in infrastructure. However, foreign fund outflows and global uncertainty could weigh on the INR in the near term.
Technical Outlook: USD/INR Remains Bullish
The USD/INR pair hovers near its all-time high of 84.88, with technical analysis suggesting a continuation of the bullish trend. The pair trades within an ascending channel pattern, supported by a 14-day Relative Strength Index (RSI) close to the overbought territory of 70. A breakout above the 84.88 resistance level could propel the pair toward the 85.10 mark, representing the upper boundary of the channel.
Support levels for the pair are found near the nine-day Exponential Moving Average (EMA) at 84.73, coinciding with the channel’s lower boundary around the psychological level of 84.70. A breach of these levels could signal a temporary pullback; however, the overall bias remains tilted toward the upside.
Market Participants Eye Key Events
Market participants will closely monitor developments in the US-China trade dynamics and the outcomes of the Federal Reserve’s policy meeting. Additionally, any signals from the RBI regarding intervention or policy measures will be pivotal in shaping the USD/INR trajectory in the coming sessions.
TotaFX Capital advises traders to remain vigilant, as market volatility is expected to persist. Leveraging technical analysis tools and keeping abreast of macroeconomic updates can help navigate the evolving forex landscape effectively.
