USD/INR jumps as investors brace for US CPI inflation data

• The Indian Rupee weakens in Thursday’s early European session. 
• A muted sentiment in Indian markets and a firmer USD undermine the INR. 
• The US CPI inflation data will take center stage on Thursday. 

The Indian Rupee (INR) trades on a weaker note on Thursday. A muted trend in the domestic market and a stronger US Dollar (USD) weigh on the local currency. However, robust Indian macroeconomic fundamentals and the inclusion of government bonds in global indices would attract foreign investors and lift the INR. 

The release of the key US Consumer Price Index (CPI) inflation data will be the highlight on Thursday. The US Initial Jobless Claims will be released on the same day, and the Federal Reserve’s (Fed) Lisa Cook and John Williams are scheduled to speak. 

Daily Digest Market Movers: Indian Rupee remains weak ahead of key US inflation data

• FTSE Russell said on Tuesday that Indian sovereign bonds will be added to its Emerging Markets Government Bond Index (EMGBI), following a similar move by JP Morgan and Bloomberg Index Services.
• The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 6.5% for the tenth consecutive meeting but changed the policy stance to neutral from withdrawal of accommodation.
• The Indian central bank kept the CPI inflation estimate for FY25 unchanged at 4.5% while maintaining the Gross Domestic Product (GDP) growth estimates for FY25 at 7.2%.
• According to minutes released Wednesday, the Federal Open Market Committee (FOMC) members agreed to cut interest rates in September but were unsure how aggressively to go, ultimately deciding on a half-percentage point move in an effort to balance inflation concerns with labor market worries.
• Fed Boston President Susan Collins said on Wednesday that it was “prudent” for officials to cut rates by a half percentage point last month as inflation eases and the economy becomes more vulnerable to shocks.
• San Francisco Fed President Mary Daly noted on Wednesday that she "fully" supported the Fed’s half-of-a-percentage-point interest-rate cut in the September meeting. Daly added that one or two more rate cuts this year are likely if the economy evolves as she expects. 
• Dallas Fed President Lorie Logan argued on Wednesday that she supported last month's substantial interest-rate cut but favored smaller reductions going forward as there were "still real" upside risks to inflation. 

Technical Analysis: USD/INR’s bullish outlook remains intact in the longer term

The Indian Rupee edges lower on the day. The USD/INR pair maintains a constructive view on the daily chart, with the price holding above the descending trend line and the key 100-day Exponential Moving Average (EMA). The 14-day Relative Strength Index (RSI) is located above the midline near 58.60, suggesting the support level is likely to hold rather than break. 

The 84.00 psychological level appears to be a tough nut to crack for USD/INR bulls. Sustained bullish momentum above this level could see a rally to the all-time high of 84.15, en route to 84.50. 

On the flip side, the first downside target is seen near the resistance-turned-support level at 83.90. Any follow-through selling could expose the 100-day EMA at 83.67. The key contention level emerges at 83.00, representing the round mark and the low of May 24. 

RBI FAQs

What is the role of the Reserve Bank of India?

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.

How do the decisions of the Reserve Bank of India affect the Rupee?

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.

Does the Reserve Bank of India directly intervene in FX markets?

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.

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