The Indian rupee has staged a strong comeback this year, making it on of the top-performing currencies. The USD/INR pair plunged to a low of 85.50, its lowest level since January 2 and 2.7% below its highest point this year. This article explains why the Indian rupee is soaring and what to expect.
US dollar index crash
One reason why the USD/INR exchange rate has crashed is that the US dollar index has embarked on a strong downtrend this yea. The DXY index has crashed from the year-to-date high of $110 to $104 today. This decline happened as the greenback plunged against most developed and emerging market currencies.
The US dollar index has dropped because of the ongoing fear that the economy may be moving towards a recession. If this happens, it will be a self-inflicted recession because of Donald Trump’s trade war against allies and foes.
A closely watched tracking metric by the Atlanta Fed shows that the economy will likely contract by 1.8% in the first quarter. This will disrupt a growth momentum that has been going on in the past few years.
A recession will likely push the Federal Reserve to intervene, potentially by cutting interest rates and implementing quantitative easing (QE) policies. The US dollar index often underperforms in those conditions.
Indian rupee and US dollar swap
The USD/INR exchange rate has also crashed after the Reserve Bank of India (RBI) ran a $10 billion currency swap program that became oversubscribed.
This deal allowed the central bank to inject about $10 billion worth of rupees into the banking system, a move that will be reversed in the next three years. It has already injected such liquidity worth over $64 billion in the past few months.
The USD/INR pair has also crashed after the RBI slashed interest rates for the first time in five years. It did that as data showed that the economy was slowing.
Ideally, the Indian rupee should fall after the country’s rate cuts. However, the currency surged as investors bought the news. This is the opposite of the popular scenario known as buying the rumors and selling the news.
Analysts now expect that the RBI will deliver more cuts this year. The base case is where it slashes rates by 0.25% in April and two more later this year. Besides, recent data showed that the country’s inflation has continued falling this year. Also, there are signs that the Indian economy will be affected by Donald Trump’s tariffs.
The Indian rupee has also surged because of the overall view that the currency was much undervalued after falling to a record low in 2024.
USD/INR technical analysis
USDINR chart by TradingView
The weekly chart shows that the USD/INR exchange rate has plunged in the last four weeks straight. It has moved from a high of 87.98 to a low of 85.62, its lowest level since January 6.
The pair is attempting to retest the 50-week moving average at 84.88. It is also attempting to retest the upper side of the rising wedge that formed between October 2022 to November last year.
Therefore, the path of the least resistance is downward, with the next level to watch being at 84.50, down by 1.40% from the current level.
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