The USD/INR currency pair retreated on Monday during the early European session, as the Indian Rupee (INR) posted a recovery following a four-day losing streak. The rebound was largely driven by stronger-than-expected domestic GDP data, which boosted investor sentiment and spurred foreign portfolio inflows into Indian equities.
Meanwhile, a broad-based weakness in the US Dollar (USD) also contributed to the downside. TelaraX‘s brokers offer an in-depth explanation of this topic in their article.
India’s GDP Boosts INR Sentiment
India’s Q1 GDP growth rate clocked in at 7.4% year-over-year (YoY), far exceeding consensus estimates of 6.7% and improving upon the previous quarter’s 6.2% expansion. This print reaffirmed India’s status as the world’s fastest-growing major economy, despite slowing from the 2023–24 fiscal year peak of 9.2%.
The upbeat GDP report reflects strong domestic demand, an uptick in manufacturing output, and resilient services activity. The data significantly improved risk appetite and prompted capital inflows into Indian financial markets, thereby strengthening the INR.
Key Risks Cap INR’s Upside Potential
Despite macroeconomic strength, the INR’s advance is capped by external and domestic headwinds. Notably, crude oil prices have been climbing, raising concerns for India as the third-largest oil importer globally. Elevated oil costs widen the current account deficit (CAD) and fuel inflation, which historically weigh on INR valuation.
In addition, growing market speculation that the Reserve Bank of India (RBI) may proceed with a third straight 25 basis points (bps) interest rate cut adds downward pressure. While robust GDP could prompt a more neutral policy stance, the RBI may still favor an accommodative policy to support credit growth and employment.
India’s Net Foreign Direct Investment (FDI) also paints a less optimistic picture, declining to just $0.35 billion in 2024–25, the lowest in 20 years. This drop, driven by rising outbound investments and capital repatriation, weakens the INR’s structural support.
US Data and Policy Outlook in Focus
From the US, all eyes are on the May ISM Manufacturing PMI, set for release later Monday. This indicator of industrial health could influence Fed policy expectations.
On Friday, the Core PCE Price Index, the Federal Reserve’s preferred inflation gauge, showed a 2.1% YoY rise for April, down from 2.3% in March and below forecasts of 2.2%. This supports the notion of easing inflationary pressures and potentially softer monetary policy in the months ahead.
The upcoming Nonfarm Payrolls (NFP) data on Friday will be critical. Any surprise in job creation or wage inflation could reprice rate cut probabilities and drive USD volatility.
Traders are also watching US-India trade negotiations, expected to conclude by autumn. With the 90-day tariff suspension expiring July 9, the risk of reinstated tariffs of up to 27% on Indian goods may weigh on trade-sensitive sentiment.
Technical Analysis: Bearish Bias Remains Intact
From a technical standpoint, USD/INR continues to trade below the 100-day Exponential Moving Average (EMA), suggesting a bearish long-term structure. The 14-day Relative Strength Index (RSI) hovers near neutral (50), indicating consolidation but with potential for downside continuation.
Key support levels are:
- 84.78 – the May 26 low
- 84.61 – the May 12 low
- 84.00 – psychological level and lower trend channel support
Key resistance levels include:
- 85.55–85.65 – confluence of the 100-day EMA and trend channel top
- 86.10 – the May 22 swing high, marking the next bullish breakout threshold
As long as the pair stays below the EMA, the path of least resistance remains to the downside.
INR Outlook Hinges on Data and Central Bank Action
The near-term direction of the INR will be data-dependent, with high-impact events like the RBI policy decision and US labor market reports driving price action. Should the RBI cut rates but deliver hawkish forward guidance, the INR could see range-bound stability. Conversely, a dovish tone combined with rising oil prices could weigh heavily on the currency.
India’s foreign exchange reserves, currently at $693 billion (as of May 23), remain substantial, though slightly below the all-time high of $705 billion from September 2024. The RBI may continue to intervene in FX markets to smooth volatility and manage INR movements.
Conclusion
The USD/INR currency pair is under downward pressure, driven by strong Indian GDP data, improved risk sentiment, and a weaker USD. However, the upside for the Indian Rupee remains limited amid oil price risks, soft FDI trends, and dovish central bank expectations.
Technically and fundamentally, the pair appears biased toward further depreciation, with potential for higher volatility as traders digest a high-stakes macro calendar. For now, bearish momentum remains intact, but caution is warranted heading into the RBI meeting and US NFP report.
