The Indian Rupee (INR) extended its decline on Friday, closing at a record low for the eighth consecutive session. The local currency remains under significant pressure due to heightened demand for the U.S. Dollar (USD) in the non-deliverable forward (NDF) market, which has widened the arbitrage gap with the Indian onshore market.
Several factors are contributing to the INR’s continued weakening, including disappointing economic growth in India, a widening trade deficit, and a slowdown in capital inflows. Despite these challenges, the Reserve Bank of India (RBI) may intervene in the foreign exchange market by selling USD to provide short-term support for the INR.
Traders are also awaiting key economic data from the U.S., including the December ISM Manufacturing Purchasing Managers Index (PMI), due later on Friday, as well as comments from Federal Reserve Bank of Richmond President Thomas Barkin.
Indian Rupee Faces Downward Pressure Amid Slowing Growth
The Indian Rupee is expected to experience further slight depreciation in 2025, driven by volatile foreign portfolio investment (FPI) flows and a potentially stronger U.S. dollar, according to a report by the Bank of Baroda. State-run banks have been seen selling USD in large quantities, with estimates ranging from $800 million to $1 billion.
In December, India’s HSBC Manufacturing PMI dropped to 56.4, down from 57.4 in November, marking the lowest level in 2024 and coming in below the expected 57.8. Ines Lam, an economist at HSBC, noted that “India’s manufacturing activity ended a strong 2024 on a softer note, with signs of a slowing trend in the industrial sector. The rate of expansion in new orders was the slowest of the year, suggesting weaker future production growth.”
In contrast, U.S. economic data showed improvement, with Initial Jobless Claims for the week ending December 28 falling to 211K, down from 220K the previous week, which helped bolster the USD.
USD/INR Outlook
The USD/INR pair continues to show a firm upward trend, supported by the recent breakout above the ascending trend channel on the daily chart. The pair is holding above the key 100-day Exponential Moving Average (EMA), suggesting the path of least resistance remains to the upside. However, the 14-day Relative Strength Index (RSI), currently above 70, indicates overbought conditions, signaling that further consolidation may occur before any additional USD/INR appreciation.
Should the bullish momentum continue, the first resistance level to watch is the all-time high of 85.81, with the psychological 86.00 mark potentially serving as the next barrier. On the downside, support is found at 85.54, which could pave the way for a decline toward 85.00. The 100-day EMA at 84.40 will also be a critical level to monitor for potential downside moves.
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