The Indian Rupee (INR) has regained some ground on Tuesday after hitting a fresh all-time low in the previous session. Data released by the Ministry of Commerce and Industry revealed that India’s Wholesale Price Index (WPI) inflation rose to 2.37% in December, surpassing expectations of 2.30% and up from the prior reading of 1.89%. The local currency strengthened in the immediate aftermath of the inflation data.
Despite this brief recovery, the INR remains under pressure due to rising crude oil prices and significant foreign capital outflows from Indian equities. Additionally, the US Dollar (USD) strengthened following stronger-than-expected US employment data, which led to market expectations that the US Federal Reserve (Fed) would reduce interest rate cuts in 2025, further weakening the INR.
Traders will closely monitor the upcoming release of the US Producer Price Index (PPI) for December later on Tuesday, as well as a speech by Fed Kansas City President Jeff Schmid, which could provide additional market direction.
INR Faces Multiple Headwinds Amid Weakening Fundamentals
India’s retail inflation, measured by the Consumer Price Index (CPI), eased to 5.22% in December from 5.48% in November, slightly softer than the expected 5.3%. Meanwhile, the Consumer Food Price Index (CFPI) showed a significant year-on-year increase of 8.39% for December.
Anil Kumar Bhansali, Head of Treasury at Finrex Treasury Advisors, noted that the Reserve Bank of India (RBI) is likely to allow the INR’s weakness to persist, as demand continues to rise while supplies dwindle. The RBI’s efforts to stabilize the currency by selling USD in both spot and forward markets may provide some temporary relief, but the INR remains fragile.
India’s foreign exchange reserves fell by USD 5.693 billion to USD 634.585 billion. Foreign investors have pulled approximately $2 billion from Indian equities this year, with net sales of $705.5 million in fixed-income securities recorded on January 8.
Markets are now pricing in just one rate cut from the Fed in 2025, down from the initial expectation of two quarter-point cuts, further contributing to the INR’s challenges.
Technical Outlook for USD/INR: Caution Advised for Bulls
From a technical perspective, the USD/INR pair remains on a bullish trajectory, with the price forming higher highs and higher lows, and trading above the key 100-day Exponential Moving Average (EMA). However, caution is warranted as the 14-day Relative Strength Index (RSI) has surpassed the 70.00 mark, signaling overbought conditions and the potential for short-term consolidation.
The first target for the USD/INR pair is the all-time high of 86.69, with a break above this level potentially driving the pair towards the psychological 87.00 mark. On the downside, initial support is seen at 85.85, the January 10 low, followed by 85.65 and 85.00, key levels to watch for any potential retracement.
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