Main Highlights
- The Indian Rupee (INR) saw a notable jump against the US Dollar (USD) in early trading, reaching near 88.50.
- This strengthening is attributed to potential intervention by the Reserve Bank of India (RBI) to support the local currency.
- The US Dollar Index (DXY) also reached a three-month high, driven by easing expectations of Federal Reserve interest rate cuts.
- Foreign Institutional Investors (FIIs) have shown some slowdown in selling Indian equities, but net selling continued into November.
- Technical analysis suggests USD/INR is testing key support levels, with a significant all-time high acting as a resistance.
The Indian Rupee (INR) experienced a significant ascent in the opening session on Tuesday, trading near 88.50 against the US Dollar (USD). This appreciation has been met with considerable selling pressure on the USD/INR pair, fueled by expectations that the Reserve Bank of India (RBI) has actively intervened in the currency market to bolster the Rupee.
Reports suggest that the RBI likely engaged in currency market intervention prior to the opening of the local spot market on Tuesday.
This so-called stealth intervention by the RBI appears to be a preemptive measure against fears that the USD/INR pair could breach its recent all-time high of approximately 89.10, a scenario that could impose considerable pressure on Indian importers.
Underlying Market Dynamics
The Indian Rupee has faced depreciation primarily due to persistent outflows of foreign capital from the Indian stock market. Foreign Institutional Investors (FIIs) have been net sellers for the past four months. However, the pace of these outflows showed a noticeable slowdown in October, with FIIs paring stakes worth Rs. 2,346.89 crores. This figure is significantly lower than the average selling of Rs. 43,290.32 crores observed during the July-September period.
Despite this recent slowdown, foreign investors began the November trading period with net selling activity in the Indian equity market, offloading shares worth Rs. 1,883.78 crores on Monday alone.
Dollar Strength Amid Shifting Fed Expectations
While the Indian Rupee demonstrated strength against the US Dollar in early trading, largely due to RBI intervention, the US Dollar itself has shown resilience against its major currency peers. This broader Dollar outperformance stems from traders scaling back their bets on further interest rate cuts by the Federal Reserve (Fed) this year.
📍 The US Dollar Index (DXY), which measures the Greenback’s value against a basket of six major currencies, reached a fresh three-month high near the 100.00 mark during Tuesday’s Asian session.
📊 The probability of the Federal Reserve implementing a 25 basis point (bps) interest rate cut in December, bringing the target range to 3.50%-3.75%, has diminished. According to the CME FedWatch tool, this probability has eased to 67.3% from a high of 94.4% observed just a week prior.
⚡ This shift in dovish bets followed comments from Fed Chairman Jerome Powell. In a press conference last week, he indicated that a December rate cut was far from a foregone conclusion, noting that policymakers held strongly different views during the monetary policy meeting.
💡 Further reinforcing this stance, San Francisco Fed Bank President Mary Daly and Fed Governor Lisa Cook have suggested that the December policy decision will be highly data-dependent. Cook, in prepared remarks at the Brookings Institution, highlighted elevated risks to both employment and inflation mandates. She cautioned that maintaining rates too high increases the likelihood of a sharp deterioration in the labor market, while lowering rates too aggressively could risk unanchoring inflation expectations.
📌 Looking ahead, market participants will be closely watching the ADP Employment Change data for October. This report will provide crucial insights into the current state of the labor market, especially given the limited availability of Nonfarm Payrolls (NFP) data due to the ongoing federal shutdown. The ADP report is projected to indicate that the private sector added 24,000 jobs in October, a significant improvement from the 32,000 job losses recorded in September.
Technical Outlook for USD/INR
On Tuesday, the USD/INR pair experienced a sharp decline, trading near the 88.50 level. The pair is currently testing the 20-day Exponential Moving Average (EMA), which is positioned around 88.54.
The 14-day Relative Strength Index (RSI) has retreated after failing to surpass the 60.00 mark, signaling that selling pressure is present at higher price levels.
On the downside, the low recorded on August 21 at 87.07 is expected to serve as a critical support level for the pair. Conversely, the all-time high of 89.12 presents a significant barrier to any upward momentum.
Expert Summary
The Indian Rupee saw a substantial gain against the US Dollar, potentially driven by RBI intervention. This move occurred as the US Dollar Index itself strengthened due to reduced expectations of near-term Federal Reserve rate cuts. While foreign investor outflows from Indian equities have slowed, they persist, impacting currency dynamics.