The Indian Rupee (INR) saw a decline on Monday, pressured by increased demand for the US Dollar (USD) in the non-deliverable forwards market and a weaker Chinese Yuan. Additionally, growing expectations of a dovish shift in monetary policy following the appointment of a new Reserve Bank of India (RBI) governor contributed to the INR’s downside.
Despite the weakening of the INR, positive data from the manufacturing and services sectors provided some relief. HSBC’s preliminary estimate showed that India’s Manufacturing Purchasing Managers’ Index (PMI) rose to 57.4 in December from 56.5 in November, while the Services PMI increased to 60.8 from 58.4. The Composite PMI also climbed to 60.7 from 58.6. Despite these upbeat figures, the local currency remained under pressure, reacting negatively to the broader market sentiment.
The RBI’s routine market interventions, including selling USD, could help curb further losses for the INR. Traders are also awaiting India’s Wholesale Price Index (WPI) inflation data, set to be released later on Monday. Additionally, market participants are closely monitoring the US Federal Reserve’s policy decision on Wednesday, particularly its dot plot, to gauge potential shifts in the Fed‘s outlook.
RBI Leadership Shift and US Dollar Strength Pressure INR
The INR depreciated by 1.5% against the US Dollar in 2024 but managed to outperform many other Asian currencies, thanks in part to the RBI’s market interventions. India’s foreign exchange reserves fell by $3.2 billion to $654.86 billion, a five-month low, as of December 6, according to RBI data.
The leadership change at the RBI has led to speculation that a rate cut may be more likely in the February policy meeting. VRC Reddy, treasury head at Karur Vysya Bank, noted that this could initially weigh on market sentiment. Meanwhile, according to the CME FedWatch tool, markets are now almost fully pricing in a 25 basis point rate cut at the Fed’s December meeting, a significant shift from the previous week’s 78% probability.
USD/INR Technical Outlook: Bullish Momentum Continues
The USD/INR pair maintains a bullish outlook, supported by the 100-day Exponential Moving Average (EMA), with the 14-day Relative Strength Index (RSI) above the midline at 66.35, suggesting that the path of least resistance remains to the upside. The ascending trend channel and the psychological level of 85.00 act as key resistance levels. A breakout above these levels could propel the pair toward 85.50.
On the downside, the initial support level for USD/INR is at 84.75, near the lower boundary of the trend channel. A break below this support could see the pair test further bearish targets at 84.22 (the low of November 25) and 84.12, the 100-day EMA.
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