Quick Summary
- The Indian Rupee (INR) is trading lower against the US Dollar (USD), nearing the 90.50 mark, driven by foreign fund outflows from the Indian stock market and a dovish monetary policy from the Reserve Bank of India (RBI).
- Foreign Institutional Investors (FIIs) have been net sellers throughout December and the preceding five months, indicating persistent concerns over trade frictions between the US and India.
- Analysts at MUFG project the INR could weaken further to 92.00 against the USD if a US-India bilateral trade deal is not reached soon.
- The RBI recently reduced the Repo Rate by 25 basis points to 5.25%, injected Rs. 1 lakh crore via Open Market Operations, and initiated a $5 billion USD/INR swap, while raising its FY24 growth projection to 7.3%.
- Key economic data to watch includes this week’s November retail CPI figures, with October’s inflation already showing an annualized growth of 0.25%.
Indian Rupee Weakens Against US Dollar Amidst Fund Outflows and Dovish RBI Stance
The Indian Rupee (INR) commenced the week on a weaker footing against the US Dollar (USD), with the USD/INR pair approaching the 90.50 level. This depreciation is largely attributed to the sustained outflow of foreign funds from the Indian equity markets, coupled with a recently announced dovish monetary policy by the Reserve Bank of India (RBI).
Throughout December, Foreign Institutional Investors (FIIs) have consistently exited the Indian stock market, offloading shares worth Rs. 10,403.62 crore. This trend of net selling by FIIs has persisted for the last five consecutive months, signaling ongoing investor caution.
Trade frictions between the United States and India remain a significant concern for FIIs, contributing to their consistent selling in the Indian equity market. Analysts at MUFG have warned that the Indian Rupee could face further depreciation, potentially reaching 92.00 against the US Dollar, unless a bilateral trade agreement is secured in the coming months.
RBI’s Monetary Policy and Growth Outlook
On Friday, the Reserve Bank of India (RBI) announced its monetary policy decision, which included a widely anticipated 25 basis points cut to the Repo Rate, bringing it down to 5.25%. Additionally, the RBI committed to Open Market Operations totaling Rs. 1 lakh crore and introduced a three-year USD/INR swap facility valued at $5 billion. The central bank expressed confidence that both headline and core Consumer Price Index (CPI) inflation could reach the 4% target by Financial Year (FY) 2026-27.
The RBI revised its growth projections upwards for the current fiscal year, raising it to 7.3% from 6.8%, largely influenced by robust Gross Domestic Product (GDP) data for the third quarter. This indicates a positive outlook on India’s economic expansion despite external pressures.
Investors will be closely monitoring India’s November retail CPI data, scheduled for release this Friday. This data will provide crucial insights into inflationary pressures, following October’s 0.25% annualized growth.
Market Movers and Technical Outlook for USD/INR
As the week progresses, market participants will shift their focus to the upcoming US Federal Reserve monetary policy announcement. The US Dollar Index (DXY), which gauges the dollar’s strength against major currencies, is trading cautiously near a five-week low. Expectations are high for the Fed to implement a 25 basis points rate cut, with an 87% probability indicated by the CME FedWatch tool.
The anticipation of a rate cut is fueled by softer job market conditions and supportive comments from monetary policy officials. However, the key driver for the US Dollar’s future trajectory will be the Fed’s guidance on its monetary policy for the coming years. Many anticipate the Fed might signal a pause in easing, citing inflation levels that remain above the 2% target.
The Federal Reserve’s dot plot, which illustrates policymakers’ interest rate projections, and its assessment of the current labor market and inflation conditions will be critical elements for market participants to observe.
Technically, the USD/INR pair is trading above the rising 20-day Exponential Moving Average (EMA), indicating a bullish short-term trend. The Relative Strength Index (RSI) is currently in overbought territory at 70.61, suggesting potential for a pause or mild pullback. Initial support is noted at the 20-day EMA around 89.54. A decisive break above the all-time high near 90.70 could pave the way for further gains, while a daily close below the 20-day EMA might signal consolidation.
Frequently Asked Questions about the Indian Rupee (INR)
What is causing the Indian Rupee to weaken against the US Dollar?
The Indian Rupee is weakening due to sustained outflows of foreign funds from the Indian stock market and the Reserve Bank of India’s (RBI) adoption of a dovish monetary policy stance. Trade frictions between the US and India also contribute to investor caution.
What was the Reserve Bank of India’s latest monetary policy announcement?
The RBI cut its Repo Rate by 25 basis points to 5.25%, injected Rs. 1 lakh crore via Open Market Operations, and launched a $5 billion USD/INR swap. The RBI projects inflation to reach 4% by FY 2026-27 and raised its FY24 growth forecast to 7.3%.
What is the technical outlook for the USD/INR pair?
The USD/INR pair shows a bullish short-term trend, trading above its 20-day EMA. However, the RSI is in overbought territory. Key levels to watch are support at the 20-day EMA (89.54) and resistance near the all-time high of 90.70. A break above this level could signal further upside.
What economic data is important for the Indian Rupee this week?
Investors will be closely watching the release of India’s November retail CPI data on Friday. This will provide an update on inflationary trends in the economy.
Outlook for the Indian Rupee
The immediate outlook for the Indian Rupee remains challenging, with pressures from foreign fund outflows and global economic uncertainties. The trajectory of the USD/INR pair will be significantly influenced by upcoming monetary policy decisions from both the RBI and the US Federal Reserve, as well as developments in US-India trade relations.
While technical indicators suggest a short-term bullish trend for USD/INR, the overbought conditions warrant close monitoring. A sustained period of stability or improvement in foreign investment inflows, alongside positive domestic economic data, could provide support for the Rupee in the medium to long term.
