- The Indian Rupee weakens in Monday’s early European session.
- US Dollar demand, sustained portfolio outflows, and rising global uncertainty continue to undermine the INR.
- RBI intervention might cap the downside for the local currency.
The Indian Rupee (INR) declines on Monday, pressured by increased US Dollar (USD) demand, possibly linked to the non-deliverable forwards market. Additionally, sustained foreign portfolio investors (FPI) outflows, the concern about an economic slowdown in India, and the uncertainty of US President Donald Trump’s tariff policies contribute to the INR’s downside.
However, USD sales by state-run banks, though most likely on behalf of the Reserve Bank of India (RBI), might help limit the local currency’s losses. In the absence of the top-tier economic data releases from the US and India on Monday, the USD/INR pair will be influenced by the USD.
Indian Rupee remains fragile amid multiple headwinds
- The Indian Rupee closes at 87.4250 on Friday, down roughly 1% for the week, the largest weekly fall since December 2022.
- The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) decided to cut the policy repo rate by 25 basis points (bps) to 6.25% for the first time in nearly five years.
- “Going by Governor Sanjay Malhotra’s first policy, the RBI has adopted a more flexible approach, allowing the rupee to depreciate largely in line with global trends except for a few interventions that were seen over the past few days,” said Foram Chheda, Technical Research Analyst.
- RBI Governor Sanjay Malhotra said the central bank was keeping its policy stance “neutral,” which would open more space to support growth, signaling further rate cuts.
- The RBI forecasts headline inflation for FY25 at 4.8%, while the projection for FY26 remains unchanged at 4.2%.
- The Indian central bank estimates real GDP growth for the next year to be at about 6.7% for the first quarter (Q1), 6.7% for Q2, 7% for Q3, and 6.5% for Q4.
- US President Donald Trump said on Friday he plans to announce reciprocal tariffs on many countries by Tuesday or Wednesday, to take effect almost immediately, per Reuters.
- The US Nonfarm Payrolls (NFP) rose by 143K in January, compared to the 307K increase (revised from 256,000) seen in December, according to the US Bureau of Labor Statistics (BLS) on Friday. This figure came in below the market expectation of 170K.
- The Unemployment Rate ticked lower to 4% in January from 4.1% in December. The Average Hourly Earnings climbed 4.1% YoY in January, surpassing the market expectation of 3.8%.
USD/INR maintains a constructive view, overbought RSI warrants caution for bulls
The Indian Rupee trades on a weaker note on the day. The USD/INR pair paints a positive picture on the daily chart, characterized by the price holding above the key 100-day Exponential Moving Average (EMA).
Nonetheless, the overbought 14-day Relative Strength Index (RSI) beyond the 70.00 mark warrants caution for bullish traders, potentially signaling a temporary weakness or further consolidation in the near term.
An all-time high of 87.62 acts as an immediate resistance level for USD/INR. Bullish candlesticks and buying pressure above this level might attract bulls aiming for the 88.00 psychological level.
On the other hand, the first downside target to watch is the 87.05-87.00 regions, representing the low of February 5 and the round mark. Consistent trading below the mentioned level, the bears could take control and drag the pair down to 86.51, the low of February 3.
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.
