USD/INR consolidates below 89.00 as Indian economic outlook offsets USD strength

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The USD/INR pair extends its sideways consolidative price move through the Asian session on Monday and remains confined in a familiar range held over the past two weeks or so.

USD/INR struggles for a firm near-term direction and remains confined in a trading range.
India's strong economic outlook underpins the INR and acts as a headwind for spot prices.
The USD advances amid reduced December Fed rate cut bets and lends support to the pair.

The USD/INR pair extends its sideways consolidative price move through the Asian session on Monday and remains confined in a familiar range held over the past two weeks or so. Spot prices currently trade around the 88.75 region, down less than 0.10% for the day and well within striking distance of the all-time high, touched in September.

Moody's Ratings projected last Thursday that India's economy will grow at 7% in 2025 and 6.5% in the next year, supported by domestic and export diversification amid a neutral-to-easy monetary policy stance. This acts as a tailwind for the Indian Rupee (INR) and acts as a headwind for the USD/INR pair amid the Reserve Bank of India's (RBI) frequent market interventions.

Meanwhile, traders have fully priced out the possibility of a rate cut by the RBI in December, though a record low inflation keep the door open for more policy easing by the Indian central bank. In contrast, several Federal Reserve (Fed) officials have recently signaled a preference towards keeping interest rates unchanged at the next FOMC monetary policy meeting in December.

According to the CME Group's FedWatch Tool, the probability of a 25 basis-point (bps) rate cut next month stands at 45%, down from 50% last week. This assists the US Dollar (USD) to gain some positive traction at the start of a new week and acts as a tailwind for the USD/INR pair ahead of FOMC Minutes and the delayed US Nonfarm Payrolls (NFP) report later this week.

From a technical perspective, the recent range-bound price action might still be categorized as a bullish consolidation phase before the next leg up. That said, traders might still wait for a sustained strength and acceptance above the 89.00 round figure before positioning for the resumption of a well-established uptrend from sub-84.00 levels, or early May swing low.

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.