Rupee Gains as Softer Crude and Fed Outlook Weigh on USD/INR

Key Moments

Oil Retreat Supports INR as Middle East Risk Premium Fades

The Indian Rupee is trading on a firmer footing against the US Dollar on Thursday, pushing the USD/INR pair down toward 94.30. The move is closely tied to renewed weakness in crude prices, a key driver for an import-dependent economy like India.

WTI crude has slipped back toward levels seen before the latest conflict in the Middle East. Flows through the Strait of Hormuz – described as a vital route for nearly 20% of global energy supplies – have begun to normalize. This follows the signing of a Memorandum of Understanding and reported progress in technical discussions related to a nuclear agreement between the United States and Iran.

At press time, WTI is down 0.75% near $69.25. On the domestic derivatives side, the MCX crude oil contract expiring on July 20 is lower by 1.6%, trading close to 6,563.

Currencies from major oil-importing countries, including India, tend to benefit when crude prices decline markedly, easing external and inflation pressures.

One member of the Reserve Bank of India’s rate-setting committee has indicated that India’s growth could exceed the central bank’s 6.6% forecast and reach 7%, provided crude remains close to $70.00, according to Bloomberg.

US Dollar Softens as Markets Focus on Incoming PCE Data

A slightly weaker US Dollar is also weighing on USD/INR. During the Asian session, the Greenback shows a subdued tone as traders await the US Personal Consumption Expenditure Price Index (PCE) for May, scheduled for release at 12:30 GMT.

The US Dollar Index (DXY) is marginally lower around 101.52 at press time, although it remains close to the more-than-one-year high of 101.80 reached on Wednesday.

The May PCE report is expected to be a key catalyst for market expectations regarding the Federal Reserve’s policy path. Consensus points to core PCE inflation – the Fed’s preferred gauge – rising to 3.4% Year-on-Year from 3.3% in April.

Any indication of intensifying price pressures would likely reinforce expectations of a more hawkish Fed stance. Current readings from the CME FedWatch tool suggest the probability of at least one rate hike by the Fed this year is nearly 82%, with the likelihood of at least two hikes at 42.2%.

Foreign Investors Continue to Reduce Indian Equity Exposure

Despite the pullback in crude and the Reserve Bank of India’s efforts to downplay imminent tightening risks, overseas interest in Indian equities remains subdued.

On Wednesday, Foreign Institutional Investors sold Indian equities worth Rs. 1,843.40 crore. On the same day, RBI Governor Sanjay Malhotra told ET Now that it is “premature” to consider rate hikes, noting that the central bank does not see evidence of an energy-driven inflation shock broadening out. He added, “If we wanted to prepare the market for rate hikes, we would have changed stance from neutral to restrictive,” Malhotra added.

Technical Picture: Further USD/INR Weakness in Play Below 94.00

USD/INR is trading lower around 94.25 and maintains a bearish short-term bias, with spot prices firmly beneath the 20-day Exponential Moving Average at 94.86.

The 14-day Relative Strength Index sits near 41, pointing to ongoing downside pressure without yet signaling oversold conditions. This suggests that sellers remain in control, while scope for additional weakness persists before any exhaustion signals appear.

On the upside, initial resistance is seen at the 20-day EMA around 94.86. Above that, the lower boundary of a Descending Triangle pattern near 95.23 is expected to act as the next cap, followed by a more distant resistance area around 97.0541 associated with the trend-line’s origin.

On the downside, if the pair breaks below the May 7 low at 94.03, it would expose the April 15 high at 93.67 as the next potential support zone.

Core PCE: Fed’s Preferred Inflation Gauge in Focus

The Core Personal Consumption Expenditures Price Index, released monthly by the US Bureau of Economic Analysis, tracks changes in prices for goods and services purchased by US consumers. It excludes food and energy components, which tend to be more volatile, providing policymakers with a clearer picture of underlying inflation trends.

This core measure is explicitly cited as the Federal Reserve’s preferred inflation indicator. The Year-on-Year reading compares prices in the reference month with those from the same month a year earlier. Higher readings are typically seen as supportive for the US Dollar, while lower outcomes tend to weigh on the currency.

Why Core PCE Matters for Market Participants

Following the release of US GDP data, the Bureau of Economic Analysis publishes the PCE Price Index together with monthly figures on Personal Spending and Personal Income. Within this set, the annual Core PCE is the primary inflation benchmark used by FOMC policymakers.

A stronger-than-expected Core PCE reading can prompt markets to price in a more aggressive policy stance from the Fed, potentially lifting the US Dollar as investors anticipate tighter financial conditions. Conversely, a softer print may trigger expectations of a less hawkish or more patient stance, generally exerting downward pressure on the Greenback.