USD/INR Edges Lower as Softer Fed Outlook Caps Dollar

Key Moments

USD/INR slipped to around 96.29 as traders scaled back expectations of imminent Fed rate hikes.
Fed funds futures implied an 82.3% probability of unchanged rates in October, up sharply from 35.8% a week earlier.
RBI’s upcoming policy decision and guidance are in focus, with analysts projecting up to 75 bps of hikes over the current cycle.

INR Opens Firmer After Holiday-Shortened Session

The Indian Rupee started the week on a slightly stronger footing against the US Dollar, with USD/INR edging lower after an extended weekend. Domestic markets had been shut on Friday for Mahatma Gandhi Jayanti, and trading resumed with the pair easing to near 96.29 as participants pared back expectations for additional near-term tightening by the Federal Reserve.

The adjustment in Fed rate bets has provided some support to risk-sensitive currencies, including the Rupee. Even so, USD/INR remains close to the more than two-month peak of 96.32 reached last week, underscoring the Dollar’s still-elevated level against the Indian currency.

Fed Expectations Repriced After Soft September Jobs Data

According to the CME FedWatch tool, the implied probability that the Fed will leave interest rates unchanged at its October meeting rose to 82.3%, a significant jump from 35.8% observed the previous week.

This shift came in the wake of the September US Nonfarm Payrolls (NFP) release, which pointed to more moderate job creation and wage growth, prompting markets to reassess the likelihood of further aggressive policy tightening by the Fed.

Details of the Latest US Nonfarm Payrolls Report

On Friday, data from the US Bureau of Labor Statistics showed that the economy added 29K jobs in September, falling short of the 90K consensus forecast and well below the prior reading of 133K, which had been revised down from 162K. The Unemployment Rate ticked higher to 4.2%, compared with expectations for it to remain at 4.1%.

Average Hourly Earnings, a closely watched gauge of wage inflation, increased by 3% Year-on-Year, cooling from 3.1% in August and missing projections for a 3.2% rise. The softer wage numbers contributed to a reassessment of how hawkish the Fed will need to be, as slower pay growth reduces some inflation pressure.

The moderation in both job and wage growth has therefore encouraged investors to temper their expectations for further aggressive Fed tightening.

Dollar and US Yields Stay Elevated Despite Softer Labor Data

Despite the recalibration of Fed expectations, US Treasury yields and the Dollar have held relatively firm, supported by higher inflation projections and concerns around French fiscal dynamics.

At the time of writing, the 10-year US Treasury yield was trading slightly lower, near 5.27%, but remained close to the two-decade high of 5.34% reached last week. In Asian trading, the US Dollar Index (DXY) – which tracks the Greenback against six major peers – touched a new yearly high near 102.53.

The combination of elevated US yields and a strong Dollar may continue to exert pressure on the Rupee in the near term, even as Fed hike expectations for the very short term ease.

Focus Turns to RBI Policy Decision

The Reserve Bank of India’s upcoming monetary policy announcement on Wednesday is expected to be the key domestic catalyst for the Rupee this week.

Analysts at MUFG/BTMU reiterate that they are “officially forecasting RBI to keep rates on hold,” but emphasise that “more importantly we have already been calling for the central bank to start its hiking cycle from December so ultimately we think it’s just a matter of time before policy rates move higher.” They “see a good chance RBI will also move its stance away from neutral to signal a tightening bias,” underscoring a shift in the policy signal even if the near-term decision is unchanged.

On the projected scale of tightening, MUFG/BTMU highlight that “we have 50bps of rate hikes in our forecast profile, and have mentioned that there could be a risk of 75bps in total this cycle,” citing a backdrop where “growth is strong, liquidity is abundant, credit growth is picking up, fiscal policy is supportive, while higher commodity prices and adverse weather conditions lend inflation risk to the upside in India.” They add that “we are forecasting RBI to hike rates by 50bps this cycle with some risk of 75bps, although we note pricing in the rates market is quite rich already,” suggesting that market pricing may already reflect a relatively forceful tightening path.

USD/INR Technical Picture: Bullish Bias Intact Above 20-Day EMA

On the daily chart, USD/INR is trading around 96.29, maintaining a constructive short-term tone as spot remains above the 20-day exponential moving average (EMA), currently at 95.86. The pair is consolidating close to recent highs, with the 14-day Relative Strength Index at 65.30, nearing the threshold typically associated with overbought conditions. This indicates that while upward momentum remains robust, the move could be approaching a more stretched phase.

Initial support is seen at the 20-day EMA at 95.86, where any corrective pullback is likely to encounter buying interest before deeper downside attempts materialize. On the topside, the pair is targeting a retest of the all-time high near 97.00.