USD/INR gathers strength amid worries about Trump's tariff plans

The Indian Rupee weakens in Monday’s Asian 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 vulnerable amid multiple headwinds

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.
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 Monday or Tuesday, 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.

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.