The Indian rupee remained at its all-time low against the US dollar after the Reserve Bank of India (RBI) delivered its first interest rate cut since the pandemic. The USD/INR exchange rate was trading at 87.50 on Friday, a few points below the all-time high of 87.61. It has risen by over 5.8% from its lowest level in 2024. So, what next for the USD to INR exchange rate?
RBI slashes interest rates
The USD/INR exchange rate reacted mildly after the RBI slashed interest rates for the first time since 2020 as the Covid-19 pandemic started. It lowered the official cash rate from 6.50% to 6.25%. It then left the cash reserve ratio at 4.0% and the Reverse REPO rate at 3.25%
The Indian rupee’s mild reaction was simply because the rate cut aligned with the market expectations after Modi replaced the governor last year.
Recent economic numbers supported the dovish tone of the RBI. A recent report showed that the headline Consumer Price Index (CPI) dropped to 5.2% in December from the previous 5.48%. Inflation has retreated in the last few months, a trend that may continue.
The Indian economy is also slowing substantially. A recent report showed that the Indian economy will grow by between 6.3% and 6.8% this year. The rural areas and softer inflation will help this growth. In a note, a Bloomberg analyst said:
The Reserve Bank of India’s 25-basis-point rate cut shows the central bank is finally shifting its focus to reviving growth. With food inflation having slowed considerably since the December review, the central bank has no reason to hold back again.
Therefore, the Indian government hopes that interest rates will continue falling. It is also focusing on deregulation, which it hopes it will attract more investors at a time when Foreign Direct Investment (FDI) is falling. For example, the net FDI between April and November last year was over $479 million, down from $8.5 billion a year earlier.
The next key catalyst for the USD/INR exchange rate is the upcoming US nonfarm payroll data on Friday. This important report will play a role in the next Federal Reserve meeting in March.
In the last meeting, the Fed left interest rates unchanged and hinted that it will be data-dependent. The Fed is focusing on inflation, which is expected to remain higher, especially after the recent fires in Los Angeles.
USD/INR technical analysis
USDINR chart by TradingView
The daily chart shows that the USD to INR exchange rate has been in a strong bullish trend in the past few months. This rally may continue now that India’s interest rates have started moving downwards, with the 10-year yield moving to 6.70% from 7.40% in 2023.
The USD/INR pair has remained above the all moving averages, while the Relative Strength Index (RSI) and the MACD have all pointed upwards. Therefore, the pair will likely keep rising, with the next level to watch being at 88.50.
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