Indian Rupee Falls as Rising U.S. Yields Drive Outflows

Key Moments

INR Slides as Bond Yields and Foreign Outflows Weigh

The Indian Rupee opened weaker against the US Dollar, facing several negative catalysts that pushed the USD/INR pair higher on Tuesday. The pair advanced toward 96.43, a level not seen in more than two months, reflecting sustained selling pressure on the local currency.

A key driver has been the continued upswing in global bond yields. At the time of writing, the yield on the 10-year United States Treasury was up 0.24% and trading near 5.32, after hitting a new two-decade high around 5.35 on Monday. Elevated yields tend to dampen risk sentiment and reduce investor appetite for higher-risk assets such as the Indian Rupee.

In addition to the move in U.S. rates, ongoing foreign fund outflows from Indian equities have further undermined the currency. Over the first two trading sessions of October, Foreign Institutional Investors (FIIs) disposed of holdings worth Rs. 14,183.36 crore in the domestic stock market, adding pressure on INR.

Drivers Behind the U.S. Yield Rally

Yields on U.S. government securities have been rising sharply for months. Concerns about persistent global inflationary pressures, driven in part by energy supply disruptions linked to the Middle East war, have helped fuel the move higher in yields.

This advance in U.S. Treasury yields has continued despite softer United States Nonfarm Payrolls (NFP) data for September, which prompted market participants to pare back expectations for additional near-term interest rate hikes from the Federal Reserve.

Analysts at Societe Generale noted that while the weaker payrolls report reinforced a pullback in near-term Fed tightening expectations, they argue that it is “not a game changer for the hawkish predisposition of the Fed – inflation is the bogeyman.” They commented that the latest jobs data instead “justifies caution over cadence and quantity of future policy adjustments.”

RBI Decision in Focus as Markets Eye Policy Path

The next major domestic catalyst for the Indian Rupee is the upcoming monetary policy announcement from the Reserve Bank of India (RBI). Market participants are closely watching the central bank’s decision and accompanying guidance for signals on the future policy path.

Analysts at MUFG/BTMU reiterated that they are “officially forecasting RBI to keep rates on hold,” while stressing 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 also said they “see a good chance RBI will also move its stance away from neutral to signal a tightening bias,” indicating a potential shift in forward guidance even if the benchmark rate remains unchanged at the upcoming meeting.

On the scale of possible tightening, MUFG/BTMU stated 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,” pointing to an environment 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 added 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 markets may already be discounting a relatively forceful tightening trajectory.

USD/INR Technical Picture: Bullish Momentum Intact

On the technical front, USD/INR was trading around 96.42 on the daily chart, extending its move above the 20-day exponential moving average (EMA), which stood at 95.91. This positioning keeps the short-term bias tilted to the upside, with the rising EMA offering dynamic support.

The Relative Strength Index (14) was at 68.07, hovering just below the overbought threshold. This level indicates firm positive momentum, albeit with signs that the move may be becoming stretched.

On the downside, initial support appears near the 20-day EMA around 95.91. A retreat toward this zone could attract fresh buying interest as long as that level holds. With no immediate resistance landmarks indicated by the current dataset, any further upside is likely to be led by trend and momentum until new highs establish additional technical reference points.