The Indian Rupee (INR) edged higher against the US Dollar (USD) on Monday, reflecting a brief respite following a volatile week in currency markets. The USD/INR pair retraced from a fresh all-time high just above 88.50, settling near 88.25 at the start of trading.
Market participants attribute this dip to likely intervention by the Reserve Bank of India (RBI) aimed at supporting the local currency amid sustained foreign capital outflows. Readers will find a full explanation of the topic from BluSkyMint broker Michael Novak in this article.
Market Drivers: RBI Intervention and FII Activity
The outlook for the Indian Rupee remains uncertain, largely influenced by ongoing trade tensions between the United States and India. In August, Washington raised tariffs on Indian imports, particularly targeting oil purchases from Russia.
The US President justified the measure as a strategy to prevent India from funding Moscow amid the ongoing conflict in Ukraine.
Foreign Institutional Investors (FIIs) have responded to these developments by reducing their exposure in Indian equities. On Friday alone, FIIs sold shares worth Rs. 1,304.91 crores, and in September, cumulative sales reached Rs. 5,666.91 crores, marking the third consecutive month of net outflows.
In July and August, overseas investors sold equities totaling Rs. 94,569.6 crores, highlighting sustained pressure on domestic capital markets.
Despite these challenges, the US President’s comments last Friday injected a measure of optimism. While responding to reporters on US-India relations, he emphasized the “special relationship” between the two nations, suggesting a potential reset in diplomatic and trade ties.
Such remarks could ease some of the uncertainty surrounding foreign investment flows and support the INR in the medium term.
Weak US NFP Data and Fed Rate Expectations
Adding pressure to the US Dollar, soft Nonfarm Payrolls (NFP) data released last Friday has triggered expectations of larger-than-usual interest rate cuts by the Federal Reserve (Fed).
The August NFP report showed that the US economy added only 22,000 jobs, far below market expectations of 75,000 and the prior 79,000 reading. This represents the slowest growth in the labor force since January 2021.
The Unemployment Rate rose to 4.3% from 4.2%, signaling slackening labor market conditions. These figures have fueled Fed dovish bets, prompting traders to anticipate a potential 50 basis points (bps) reduction in the upcoming September policy meeting, taking the target rate to 3.75%-4.50%, according to the CME FedWatch tool.
The weak US labor data, coupled with prior revisions to July’s NFP report, have heightened expectations of monetary easing. Federal Open Market Committee (FOMC) officials, including Chair Jerome Powell, have acknowledged the need to support employment and economic growth amid signs of slowing labor market activity.
Market participants now look to the August Consumer Price Index (CPI) data, scheduled for release on Thursday, as a potential trigger for USD volatility.
USD Technical Outlook: Retracement and Support Levels
From a technical analysis perspective, the USD/INR pair retraced from its all-time high near 88.50 to trade around 88.25. The near-term trend retains a bullish bias, with the pair holding above the 20-day Exponential Moving Average (EMA), currently near 87.80. This level acts as a key support in the event of further downside.
The 14-day Relative Strength Index (RSI) trades above 60.00, signaling the presence of fresh bullish momentum. On the upside, the pair faces uncharted territory, with the psychological barrier of 89.00 acting as the primary resistance. Traders will likely monitor this level closely, as a break above 89.00 could trigger a new leg of volatility in the USD/INR pair.
US Dollar Index and Broader Market Sentiment
The US Dollar Index (DXY), which measures the Greenback against six major currencies, has shown broad weakness following Friday’s declines. During Monday trading, the DXY ticked up slightly to 97.80, reflecting mixed sentiment ahead of key US economic releases.
The combination of soft labor data, trader expectations of a Fed rate cut, and ongoing trade policy uncertainties continues to weigh on the USD, indirectly benefiting emerging market currencies like the INR.
Outlook and Key Takeaways
The Indian Rupee is currently navigating a complex macroeconomic landscape, characterized by domestic intervention, FIIs’ net selling, and global interest rate expectations. The USD/INR pair is likely to remain volatile, sensitive to both domestic policy actions by the RBI and US economic indicators, including CPI and employment data.
In summary, the recent tick down in USD/INR reflects a combination of factors: RBI’s likely market support, soft US labor data, and dovish Fed expectations. Traders and investors should watch key technical levels such as 87.80 (support) and 89.00 (resistance), while remaining attentive to geopolitical developments and foreign capital flows that continue to shape the INR’s trajectory.
