During the early European trading hours on Monday, the USD/INR pair exhibited a downward trend, hovering around 83.20, fueled by an improved risk appetite in the market. The subdued performance of the US Dollar (USD) has been a primary driver behind the pair’s descent, attributed to softer US consumer inflation data for April. This data has spurred speculation regarding potential rate cuts by the Federal Reserve (Fed) in the year 2024.
Analysts point to the CME FedWatch Tool, which indicates a slight uptick in the probability of the Federal Reserve implementing a 25 basis-point rate cut in September, rising from 48.6% to 49.0% over the past week. The prospect of monetary policy easing by the central bank could further weaken the US Dollar, thereby exerting downward pressure on the USD/INR pair.
Despite the growing speculation surrounding rate adjustments, the Fed remains cautious regarding inflation dynamics and the timing of potential policy actions. Federal Reserve Board of Governors member Michelle Bowman recently emphasized concerns about the steadiness of progress on inflation, highlighting that previous declines observed in inflation were transient and no substantial advancements have been made this year.
Meanwhile, in India, financial markets are closed due to general elections being held in the financial hub of Mumbai and other states on Monday. This closure limits the scope for intervention by the Reserve Bank of India (RBI) to influence the Indian National Rupee (INR) through currency market interventions.
The resilience of the Indian economy and hawkish sentiments surrounding the Reserve Bank of India (RBI) have helped cushion the INR from experiencing a more pronounced downturn. During its latest meeting, the RBI underscored the potential impact of higher food prices on inflation, signaling a need for a sustained period of elevated interest rates to manage inflationary pressures effectively.
