Indian Rupee flattens while cooling India inflation fuels RBI’s rate cut outlook

• The Indian Rupee consolidates against the US Dollar around 87.75, while inflation in India has cooled significantly.
• The US core inflation grew at a faster pace of 3.1% in July.
• Traders raised Fed dovish bets after the inflation data.

The Indian Rupee (INR) trades flat against the US Dollar (USD) at around 87.75 after opening on Wednesday. The USD/INR pair consolidates as the downside move in the US Dollar due to firm Federal Reserve’s (Fed) interest rate cut expectations for the September meeting have offset the impact of weakness in the Indian Rupee.

The Indian currency has come under pressure as growing risks of India’s retail inflation undershooting the Reserve Bank of India’s (RBI) already-lowered inflation forecast have paved the way for more interest rate cuts.

On Tuesday, India’s retail Consumer Price Index (CPI) came in at 1.55% on year, the lowest level seen since June 2017. Economists expected price pressures to have grown at a moderate pace of 1.76% against the prior reading of 2.1%. In the monetary policy announcement earlier this month, the RBI revised inflation projections for the current financial year to 3.1% from 3.7% anticipated earlier.

Cooling inflationary pressures in India, which demonstrate muted consumer demand, have come at a time when the economy is anticipating tariffs imposed by the United States (US) to shave off 30-40 basis points (bps) Gross Domestic Product (GDP) growth.

According to a written response from Union Minister of State for Finance Pankaj Chaudhary to Lok Sabha MP Abhishek Banerjee, “It is estimated that around 55% of the total value of India’s merchandise exports to the US is subject to this reciprocal tariff,” Hindustan Times (HT) reported.

Last week, US President Donald Trump raised tariffs on imports from New Delhi to 50% for purchasing Oil from Russia. On the trade deal outlook with India, US Treasury Secretary Scott Bessent said in an interview with Fox Business on Tuesday that New Delhi had been “a bit recalcitrant” in trade talks with the US.

Daily digest market movers: US Dollar has been battered by firm Fed dovish bets

• The USD/INR pair trades flat, while the US Dollar faces selling pressure as traders have raised bets supporting interest rate cuts by the Federal Reserve (Fed) after the release of the US CPI data for July.
• At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades cautiously near its two-week low around 98.00.
• According to the CME FedWatch tool, the probability of the Fed to cut interest rates in the September meeting has increased to 94% from almost 86% recorded on Monday.
• The US CPI report showed that the headline inflation grew at a steady pace of 2.7% on year, slower than expectations of 2.8%. The core CPI – which excludes volatile food and energy items – rose at a faster pace of 3.1%, compared to expectations of 3% and the prior reading of 2.9%.
• Contrary to market expectations, analysts at Scotiabank have stated that a “closer look at the July CPI data shows inflation’s pulse accelerated to its highest pace since January, with core consumer prices up 0.3% on the month. While further inflation is due before the September meeting, nothing in here says cut.”

Technical Analysis: USD/INR holds key 20-day EMA

USD/INR flattens around 87.75 on Wednesday. The near-term trend of the pair is bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 87.30.

The 14-day Relative Strength Index (RSI) oscillates inside the 60.00-80.00 range, suggesting a strong bullish momentum.

Looking down, the 20-day EMA will act as key support for the major. On the upside, the August 5 high around 88.25 will be a critical hurdle for the pair.