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USD/INR trades flat amid likely RBI’s intervention

  • The Indian Rupee holds steady near an all-time low in Wednesday’s early European session.
  • The dovish bets after the government named career bureaucrat Sanjay Malhotra as the new RBI governor might weigh on the INR.
  • Possible intervention by the RBI might help limit the INR’s losses. 
  • The US November CPI inflation report will take center stage on Wednesday. 

The Indian Rupee (INR) flat lines near a record low on Wednesday. The appointment of career bureaucrat Sanjay Malhotra as the next governor of the Reserve Bank of India (RBI) prompted traders to raise their bets on the interest rate cuts, which might undermine the local currency. Furthermore, a decline in its Asian peers and persistent strength in the US Dollar (USD) from importers and foreign banks could drag the INR lower. 

Nonetheless, significant weakness of the INR might be capped by the foreign exchange intervention by the RBI. The Indian central bank often intervenes by managing liquidity, including selling USD to prevent steep INR depreciation. Later on Wednesday, all eyes will be on the US Consumer Price Index (CPI) for November. On the Indian docket, the CPI inflation data will be released on Thursday, along with Industrial Output and Manufacturing Output. 

Indian Rupee trades sideways amid likely intervention by the RBI

  • Economists expect Das’s exit could add a dovish tilt to India’s monetary policy committee, as Das and RBI Deputy Governor Michael Patra were seen as the most hawkish members of the six-member rate-setting panel.
  • Economists at Capital Economics anticipate a 25 bps cut in India’s repo rate at Malhotra’s first MPC meeting in February, if not in an unscheduled meeting earlier. Economists estimated that the cut would come in April under Das’ leadership.
  • India’s 10-year bond yields were down 2 basis points (bps) at 6.699% on Tuesday, signaling market expectations of a rate reduction, according to data from LSEG. 
  • S&P Global Ratings on Tuesday estimated 6.8% growth for the Indian economy in FY25, followed by 6.9% growth in FY26, on the back of strong urban consumption, steady service sector growth, and ongoing investment in infrastructure. 
  • Financial markets are now pricing in nearly an 85.8% possibility of a 25 basis points (bps) rate cut by the Fed on December 17-18, according to the CME FedWatch tool.  

USD/INR keeps the bullish bias in the longer term

The Indian Rupee trades on a flat note on the day. The USD/INR pair keeps the bearish vibe on the daily timeframe as the pair is well above the key 100-day Exponential Moving Average (EMA). However, the 14-day Relative Strength Index (RSI) stands above the midline near 72.75, indicating the overbought RSI condition. This suggests that further consolidation cannot be ruled out before positioning for any near-term USD/INR appreciation.

The upper boundary of the ascending trend channel and the psychological level of 85.00 appear to be a tough nut to crack for the bulls. Sustained trading above this level could see a rally to 85.50.

On the flip side, the boundary of the trend channel and the low of December 9 at 84.65 act as an initial support level for USD/INR. A break below this support zone could drag the pair lower to the next bearish target at 84.22, the low of November 25, followed by 84.08, the 100-day EMA.

RBI FAQs

The role of the Reserve Bank of India (RBI), in its own words, is “..to maintain price stability while keeping in mind the objective of growth.” This involves maintaining the inflation rate at a stable 4% level primarily using the tool of interest rates. The RBI also maintains the exchange rate at a level that will not cause excess volatility and problems for exporters and importers, since India’s economy is heavily reliant on foreign trade, especially Oil.

The RBI formally meets at six bi-monthly meetings a year to discuss its monetary policy and, if necessary, adjust interest rates. When inflation is too high (above its 4% target), the RBI will normally raise interest rates to deter borrowing and spending, which can support the Rupee (INR). If inflation falls too far below target, the RBI might cut rates to encourage more lending, which can be negative for INR.

Due to the importance of trade to the economy, the Reserve Bank of India (RBI) actively intervenes in FX markets to maintain the exchange rate within a limited range. It does this to ensure Indian importers and exporters are not exposed to unnecessary currency risk during periods of FX volatility. The RBI buys and sells Rupees in the spot market at key levels, and uses derivatives to hedge its positions.