Indian Rupee attracts bids as traders trim Fed interest rate hike bets

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The Indian Rupee (INR) gains ground against the US Dollar (USD) on Wednesday after rising significantly in the last three trading days.

The Indian Rupee rebounds against the US Dollar as hawkish Fed bets ease.
US headline and core CPI growth cooled faster than expected in June.
Oil price rally halts while US-Iran military aggression continues.

The Indian Rupee (INR) gains ground against the US Dollar (USD) on Wednesday after rising significantly in the last three trading days. The USD/INR pair drops to near 96.11 as the US Dollar comes under selling pressure, with traders repricing Federal Reserve (Fed) interest rate expectations following the release of the softer-than-expected United States (US) Consumer Price Index (CPI) data for June.

At press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades 0.15% lower to near 100.80.

Traders trim hawkish Fed bets

On Tuesday, the US CPI report for June showed that the headline inflation cooled down at a faster-than-expected pace to 3.5% Year-on-Year (YoY) from 4.2% in May. In the same period, the core CPI – which excludes volatile food and energy items – grew at a moderate pace of 2.6% YoY against 2.8% estimates and the previous reading of 2.9%.

Signs of decelerating price pressures have eased fears of Federal Reserve (Fed) interest rate hikes in the near term.

According to the CME FedWatch tool, the odds of the Fed raising interest rates at the policy meeting this month have eased to 16.6% from 41.7% recorded on Monday.

Meanwhile, Fed Chairman Kevin Warsh has reiterated the need to bring price stability in his testimony before Congress on Tuesday. Warsh said in his prepared remarks, “The Fed has no tolerance for persistently elevated inflation.” "If we get policy right - and we will- the inflation surge of the last five years will be a thing of the past," Warsh added.

Oil price rally hits pause

Over-a-week-long rally in oil prices appears to have paused for a while as US President Donald Trump has rolled back the idea of charging a 20% toll fee from cargo ships transiting through the Strait of Hormuz, a vital passage to almost 20% of global energy supply.

However, the continued aggression between the US and Iran will keep the energy supply disrupted, a scenario that is favorable for the oil price.

FIIs dump Indian shares again

Foreign Institutional Investors (FIIs) turned out to be net sellers in the Indian stock market for the second consecutive trading day on Tuesday, paring their stake worth Rs. 739.69 crore. FIIs also sold shares worth Rs. 3,062.27 crore.

Technical Analysis: USD/INR stays above 20-day EMA

USD/INR trades subduedly at around 96.15 at press time. However, the near-term bias of the pair remains bullish as it holds above the 20-day Exponential Moving Average (EMA), which is at 95.37.

The positive slope of the EMA hints at a constructive underlying trend, while the Relative Strength Index (RSI) at 62.1 stays in bullish territory without yet reaching overbought, suggesting buyers still have room to press the move higher.

On the downside, immediate support is seen at the 20-day EMA at 95.37, where dip-buying interest could emerge if a corrective pullback unfolds. Looking up, the pair aims to revisit the all-time high at 97.10.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Indian Rupee FAQs

What are the key factors driving the Indian Rupee?

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.

How do the decisions of the Reserve Bank of India impact the Indian 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.

What macroeconomic factors influence the value of the Indian Rupee?

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.

How does inflation impact the Indian 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.