The Indian Rupee (INR) is attempting a recovery on Tuesday after reaching a fresh all-time low in the previous session. The Reserve Bank of India (RBI) is likely to intervene in the foreign exchange market, selling USD in the spot and forward markets to slow down the INR’s depreciation. Despite this, the currency remains under pressure due to multiple factors, including rising crude oil prices and significant foreign capital outflows from Indian equities. The USD has also strengthened following stronger-than-expected US employment data, raising expectations that the US Federal Reserve (Fed) will reduce its pace of interest rate cuts this year, further weighing on the INR.
RBI Interventions and Market Conditions
India’s retail inflation data, reported on Monday, showed a slight easing to 5.22% year-over-year in December from 5.48% in November. While this was softer than expectations (5.3%), food inflation, measured by the Consumer Food Price Index (CFPI), remained elevated at 8.39%. As demand grows and supply pressures persist, the RBI may allow further weakness in the INR to offset inflationary concerns.
Additionally, India’s forex reserves have declined by USD 5.693 billion to USD 634.585 billion in the week ending January 3. This, coupled with a massive outflow of around USD 2 billion from foreign investors in Indian equities and fixed-income securities, has added pressure on the INR.
The shift in market expectations regarding the Fed’s rate cuts—now pricing in only one rate cut in 2025—has further supported the USD, keeping the INR on the defensive.
USD/INR Technical Outlook: Caution Advised for Bulls
Technically, the USD/INR pair remains bullish, with the price forming higher highs and higher lows, and holding above the 100-day Exponential Moving Average (EMA) on the daily chart. However, caution is warranted as the 14-day Relative Strength Index (RSI) has surpassed the 70.00 level, signaling overbought conditions, and suggesting a possible consolidation or pullback in the near term.
The immediate upside target is the all-time high of 86.69. A decisive breakout above this level could lead to a move toward the psychological 87.00 mark. On the downside, initial support is seen at 85.85 (January 10 low). A break below this could see a drop to 85.65 (January 7 low), followed by the round figure level of 85.00.
Key Events to Watch:
India’s Wholesale Price Index (WPI) Inflation: Due later on Tuesday, any significant deviation from expectations could impact INR sentiment.
US Producer Price Index (PPI): Due later on Tuesday, with potential to influence expectations for the Fed’s future rate decisions.
Fed Kansas City President Speech: Market participants will keep an eye on comments from Fed officials, particularly regarding the outlook for monetary policy and inflation.
The INR faces a challenging environment, with external pressures, a hawkish Fed, and rising inflation contributing to its ongoing vulnerability.
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