The USD/INR exchange rate has retreated this week, helped by the ongoing interventions by the Reserve Bank of India (RBI). It also retreated after Narendra Modi met with Donald Trump at the White House. It dropped to a low of 86.36, down by almost 2% from its highest level this year.
RBI $11 billion intervention
The main catalyst for the USD/INR exchange rate was the ongoing interventions by the RBI. According to Reuters, the bank has pumped over $11 billion in liquidity in the market to reduce the rupees crash. DBS analysts estimate that the figure was about $10 billion.
Central banks have multiple ways to intervene and prevent a currency’s freefall. In RBI’s case, it increased the supply of US dollars, a move that has strengthened the local currency. It can do that because it has one of the highest foreign reserves, which stands at $650 billion.
The USD/INR pair also retreated after Narendra Modi traveled to the United States, where he met with Donald Trump. His main goal was to improve the trade relations of the two countries and avoid tariffs. The two leaders agreed to double the bilateral trade between the two countries, with the US selling F-35 fighter jets.
The announcement came a few hours after Donald Trump hinted that the US would deliver reciprocal tariffs, where it charges countries the same tariffs that other countries charge.
RBI and Fed divergence
The USD/INR exchange rate has reacted to the ongoing RBI and Federal Reserve divergence on monetary policy.
The RBI started cutting interest rates this month, moving the headline repo rate from 6.50% to 6.25%. It was the first time in five years that the central bank slashed interest rates, a move that analysts expect that the trend will continue.
The RBI slashed rates in a bid to boost an economy that is showing signs of slowing down. The most recent data showed that the economy expanded by 5.4% in the third quarter. Some analysts believe that the economy grew by 6.4% in 2024, lower than the previous year.
Therefore, there are signs that the Fed and the RBI will diverge on monetary policy. Economists expect the Fed to maintain a hawkish tone, with the Mohamed El Erian expecting it to start talking about interest rate hikes.
The four main takeaways on the higher-than-expected inflation data for the US (0.5% for headline and 0.4% for core):
Inflation is hotter than the Federal Reserve expected based on its signals, and is getting hotter;
The latest numbers are consistent with other data points;…
Data released this week showed that headline consumer inflation continued rising in January. It rose from 2.9% to 3.0%, while the core CPI moved from 3.2% to 3.3%. In a statement, Beth Hammack, the head of Cleveland Fed said:
“We have made good progress, but 2% inflation is not in sight just yet. As long as the labor market remains healthy, I am looking for broad-based evidence that inflation is sustainably returning to 2% before adjusting policy further.”
USD/INR technical analysis
The weekly chart shows that the USD to INR exchange rate peaked at 87.96 this week and then crashed after the RBI interventions. It moved to a low of 86.36, its lowest level in two weeks.
The pair remains above the 50-week Exponential Moving Average (EMA), while the MACD indicator has maintained its bullish view. Also, the Relative Strength Index (RSI) has tilted downwards.
Therefore, the USD/INR pair may resume the downtrend and retest the 50-week moving average at 84.43 in the near term. A move above the all-time high of 87.95 will invalidate the bearish view.
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