The Indian Rupee (INR) slipped against the US Dollar (USD) on Tuesday, reversing the previous session’s modest gains as the Greenback found support ahead of crucial US labor market data.
At the time of writing, the USD/INR currency pair trades around 85.65, reflecting renewed bearish pressure on the Rupee amid a backdrop of global economic unease and local equity market fragility. With input from its broker team, NordaLueur breaks down this topic in a reader-friendly article.
USD/INR Rises Amid Dollar Stability
After touching a six-week low on Monday, the US Dollar Index (DXY) stabilized as traders awaited the JOLTS Job Openings report, a key labor indicator that influences expectations for the Federal Reserve’s rate trajectory. This stabilization in the Greenback has coincided with weakness in emerging market currencies, notably the Indian Rupee.
The USD/INR pair is currently trading well above Monday’s high, and its upward bias signals intensified INR selling pressure, underpinned by a confluence of macro and market-specific factors.
INR Under Pressure: Equities, Crude, and Capital Outflows
Three primary forces are exerting downward pressure on the Rupee:
- Falling Indian Equities: The BSE Sensex dropped sharply by 636.24 points to settle at 80,737.51, while the Nifty 50 fell 174.10 points, ending the day at 24,542.50. These equity losses have dented investor sentiment, triggering foreign capital outflows.
- FII Net Outflows: According to NSE data, foreign institutional investors (FIIs) offloaded equities worth ₹2,589.47 crore in Monday’s cash segment, indicating a risk-off mood toward Indian assets amid global uncertainty.
- Rising Crude Oil Prices: Firming Brent Crude prices are weighing on the Indian currency, as India remains a net oil importer. Higher oil import bills worsen the current account deficit (CAD) and increase demand for dollars, thereby weakening the Rupee.
RBI Rate Decision in Focus: A Third Cut Likely
Investor attention now turns to the Reserve Bank of India (RBI) and its upcoming Monetary Policy Committee (MPC) meeting, slated for June 4-6. The market is pricing in a third consecutive 25-basis-point (bps) rate cut, which would lower the benchmark repo rate to 5.75%.
The RBI had already implemented back-to-back 25-bps cuts in February (to 6.25%) and April (to 6.00%), signaling a pivot toward accommodative monetary policy to stimulate growth.
Supportive Macroeconomic Conditions
Recent macroeconomic indicators provide the RBI with ample room to ease further:
- Inflation Cooling: The Consumer Price Index (CPI) moderated to 3.16% in April, down from 3.34% in March, and remains below the central bank’s 4% target, reinforcing the case for more rate cuts.
- Strong GDP Growth: India’s economy expanded by a solid 7.4% YoY in Q1, buoyed by robust domestic consumption and industrial output, signaling resilience despite global headwinds.
According to Rajani Sinha, Chief Economist at CareEdge Ratings, “In this environment of easing inflation and heightened global uncertainties, we expect the MPC to maintain its focus on supporting the ongoing recovery in the growth momentum. The rate-cutting cycle that began in February will likely continue.”
SBI Forecasts More Aggressive Easing
In contrast to the consensus 25-bps expectation, a recent report by the State Bank of India (SBI) suggested the central bank might go further, opting for a 50-bps rate cut to jump-start credit expansion and mitigate external risks.
The SBI report highlighted that commercial bank credit growth has slowed to 9.8% as of May 16, compared to a 19.5% growth rate recorded a year ago. This sharp deceleration in lending growth, combined with global volatility, could prompt the RBI to act more decisively.
Market Implications and Outlook
The combined impact of a steady US Dollar, domestic equity losses, foreign fund outflows, and rising energy prices presents a challenging landscape for the INR in the near term.
If the RBI delivers a larger-than-expected rate cut, the Rupee could face additional depreciation pressures unless accompanied by strong dovish signaling aimed at reviving credit activity and economic confidence.
Traders and investors will be closely watching:
- The tone of the RBI policy statement and future guidance
- The performance of global risk assets, particularly US equity indices
- Further US macro data, including non-farm payrolls and CPI prints
- Movements in global crude oil benchmarks
A hawkish surprise from the Fed or persistent oil price increases could further tilt the balance against the Rupee, pushing USD/INR toward new highs.
Conclusion
The Indian Rupee’s depreciation on Tuesday is emblematic of broader macro-financial pressures intersecting with domestic vulnerabilities. While recent economic data supports further monetary easing, the looming RBI decision comes at a critical time.
Whether the central bank opts for a measured 25-bps cut or a bolder 50-bps move, the outcome will have material implications for bond yields, equity sentiment, and currency direction. As the USD/INR hovers near multi-week highs, the INR’s trajectory will remain tied to both domestic policy signals and evolving global macroeconomic dynamics.
