Key Moments
- USD/INR declined to a new more than two-week low near 95.30 as the Indian Rupee continued its week-long advance.
- Market skepticism about the Federal Reserve’s resolve on inflation weighed on the US Dollar, even as the DXY traded near 100.23 after a sharp drop on Thursday.
- Investors are focused on the Reserve Bank of India’s August 5 policy decision, with expectations that the benchmark repurchase rate will remain at 5.25%.
Rupee Gains as Dollar Retreats
The Indian Rupee (INR) strengthened further against the US Dollar (USD) on Friday, extending a rally that has lasted for a week. The USD/INR pair slipped to a new more than two-week low around 95.30, pressured by an overnight slide in the US Dollar amid rising doubts over how firmly the Federal Reserve (Fed) intends to tackle United States (US) inflation.
At the time of writing, the US Dollar Index (DXY), which measures the Greenback against six major peers, was up 0.27% near 100.23. This bounce followed a sizeable decline of nearly 0.9% on Thursday, when the index fell to around 99.86.
Markets Question Fed’s Inflation Fighting Stance
Analysts at ING said, “Looking at the market’s reaction [to the Fed’s press conference], the conclusion was that the Fed was not going to be as tough on fighting inflation as initially thought.”
During the policy press conference, Fed Chair Kevin Warsh kept to a cautious script and refrained from offering explicit “forward-guidance” on the interest rate path. Warsh reiterated that policymakers stand ready to adjust monetary settings to address elevated inflation, stating, “Committee remains resolute to deliver price stability, and we will not hesitate to act,” while avoiding concrete signals on the timing or magnitude of future moves.
Higher Oil Prices Threaten to Cap INR Strength
The Rupee’s appreciation faces a potential headwind from persistently elevated oil prices. Fears of prolonged energy supply constraints, driven by the ongoing exchange of attacks between the US and Iran, are expected to limit further gains for the Indian currency.
The conflict between the two countries is seen as unlikely to be resolved in the near term, with Iran continuing to press for recognition of its authority over the Strait of Hormuz. At the same time, efforts by Iran-aligned Houthis to monetize the Bab el-Mandeb Strait – a key passage linking the southern Red Sea to the Gulf of Aden – are adding to tensions across the broader Middle East.
Strategists at TD Securities noted that continuing disruptions and supply restrictions are tightening the global energy backdrop, emphasizing that “we continue to see reduced flows and global tightening of the energy market as supportive of further upside in crude oil.” They underscored that constrained supply remains a central factor behind the potential for additional increases in crude prices, even as some systematic market participants maintain cautious positioning.
Currencies of economies that depend heavily on imported oil to meet domestic energy requirements, such as India, typically underperform when crude prices stay elevated.
RBI Policy Decision in Focus
Looking ahead, the next major catalyst for the Rupee is the Reserve Bank of India’s (RBI) monetary policy announcement scheduled for August 5.
Commerzbank analysts anticipate that the RBI will keep its policy stance unchanged at the upcoming meeting, saying the central bank is “expected to leave the benchmark repurchase rate unchanged at 5.25% at its next meeting on 5 August.” They highlighted that “inflation risks remain tilted to the upside due to higher global commodity prices and a weaker monsoon season,” but also noted that the June CPI release “rose 4.4% yoy, which was within RBI’s 2-6% target range,” supporting the case for policy continuity.
USD/INR Technical Outlook: Bias Tilts Lower
From a technical perspective, USD/INR extended its slide toward 95.30 on Friday, preserving a bearish short-term profile while trading below the 20-day Exponential Moving Average (EMA), currently around 95.81.
The pair’s continued failure to break above this moving average suggests that rebound attempts remain limited for now. The Relative Strength Index (RSI) hovering near 44 points to waning upside momentum after the prior upswing, reinforcing the likelihood of additional consolidation or renewed downside attempts.
On the upside, the first notable resistance is located near the 20-day EMA at 95.81. A daily close above this level would be required to challenge the 96.00 area. On the downside, price action is seen as vulnerable to further weakness toward the July 7 low at 94.80.
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