USD/INR weakens on RBI intervention, investors brace for US CPI release

The Indian Rupee gains traction in Wednesday’s Asian session.
RBI intervention helps to limit INR’s losses.
The Indian and US CPI inflation data will be the highlights later on Wednesday.

The Indian Rupee (INR) extends its upside on Wednesday, bolstered by the strong intervention from the Reserve Bank of India (RBI). Additionally, the US Dollar (USD) selling by exporters and profit-booking by speculators provide some support to the local currency.

However, the upside for the INR might be limited due to the concern about India’s sluggish growth, widening trade deficit, rising crude prices and the risk of fresh US trade tariffs. Later on Wednesday, investors will keep an eye on the Indian Consumer Price Index (CPI) for January, Industrial Output and Manufacturing Output. On the US docket, the CPI inflation will be closely watched. Also, the Federal Reserve’s (Fed) Raphael Bostic and Christopher Waller are set to speak.

Indian Rupee strengthens despite trade tensions

Indian Rupee depreciated 3.60% since September 2024, which was lower compared to the Japanese Yen (-6.49%), Canadian Dollar (-5.71%), British Pound (-7.58%), Australian Dollar (-9.04%), and Euro (-7.53%), according to the Bloomberg data.
Foreign investors have pulled out over $7.5 billion, on a net basis, from Indian stocks and bonds so far this year.
In his semi-annual report to Congress, Fed’s Powell said the Fed officials “do not need to be in a hurry" to cut interest rates due to strength in the job market and solid economic growth.
Powell further stated that Donald Trump's tariff policies could put more upward pressure on prices, making it harder for the central bank to lower rates.

USD/INR’s shooting star received confirmation, downward pressure expected in the shorter term

The Indian Rupee edges higher on the day. According to the daily chart, the USD/INR pair keeps the bullish vibe above the key 100-day Exponential Moving Average (EMA), indicating that the support is likely to hold rather than break.

Additionally, the upward momentum is reinforced by the 14-day Relative Strength Index (RSI), which stands above the midline near 53.00, suggesting that further upside looks favorable.

The first upside target for USD/INR emerges at the 87.00 psychological level. Sustained trading above this level could pave the way to an all-time high near 88.00. Further north, the next hurdle is seen at 88.50.

On the other hand, the initial support level is located at 86.51, the low of February 3. Bearish candlestick below the mentioned level could expose 86.14, the low of January 27.

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.