Indian Rupee slips as US Dollar stabilizes, RBI rate cut bets in focus
- USD/INR trades near 85.65 as the Indian Rupee weakens against a steady US Dollar.
- INR pressured by falling equities, rising oil prices, and FII outflows.
- RBI expected to cut rates for a third time; SBI hints at a possible 50 bps cut.
The Indian Rupee (INR) weakens against the US Dollar (USD) on Tuesday, giving back Monday’s gains as the Greenback stabilizes ahead of key US labor market data. The US Dollar is finding support after dropping to a six-week low in the previous day, with traders awaiting the JOLTS Job Openings report.
The USD/INR pair is hovering above Monday's high, at the time of writing, trading around 85.65. The upward move reflects growing pressure on the Rupee, driven by rising Crude Oil prices, lackluster equity performance, and foreign fund outflows.
Indian equities extended losses on Tuesday, with the BSE Sensex falling 636.24 points to close at 80,737.51, while the Nifty 50 declined 174.10 points to settle at 24,542.50. Foreign institutional investors (FIIs) were net sellers in the cash segment, pulling out ₹2,589.47 crore worth of equities on Monday, according to exchange data.
Looking ahead, market focus will shift to the Reserve Bank of India’s (RBI) upcoming Monetary Policy Committee (MPC) meeting, scheduled for June 4-6. The central bank is widely expected to deliver a third consecutive 25-basis-point (bps) rate cut, which would bring the benchmark repo rate down to 5.75%. The RBI had previously lowered the policy rate by 25 bps in February to 6.25% and again in April to 6.00%, as it continues to support economic growth amid softening inflation and global uncertainty.
India’s recent macroeconomic data paints a broadly positive picture. The Consumer Price Index (CPI) inflation eased to 3.16% in April from 3.34% in March, comfortably below the Reserve Bank of India’s 4% target, thereby strengthening the case for further monetary easing. At the same time, GDP expanded by a robust 7.4% YoY in Q1, supported by strong momentum in domestic demand and industrial activity.
Commenting on the policy outlook, Rajani Sinha, Chief Economist at CareEdge Ratings, said, “In this environment of easing inflation and heightened global uncertainties, we expect the MPC to maintain its focus on supporting the ongoing recovery in the growth momentum. The rate-cutting cycle that began in February will likely continue, with a further 25-bps reduction in the repo rate expected at the June meeting, while retaining an accommodative stance.”
Meanwhile, in a more aggressive call, a recent State Bank of India (SBI) research report suggested that the RBI may opt for a 50-bps rate cut at the upcoming meeting to stimulate the credit cycle and counterbalance external uncertainties. The report noted that commercial banks’ credit growth slowed to 9.8% as of May 16, against last year’s growth of 19.5%.
Indian economy FAQs
The Indian economy has averaged a growth rate of 6.13% between 2006 and 2023, which makes it one of the fastest growing in the world. India’s high growth has attracted a lot of foreign investment. This includes Foreign Direct Investment (FDI) into physical projects and Foreign Indirect Investment (FII) by foreign funds into Indian financial markets. The greater the level of investment, the higher the demand for the Rupee (INR). Fluctuations in Dollar-demand from Indian importers also impact INR.
India has to import a great deal of its Oil and gasoline so the price of Oil can have a direct impact on the Rupee. Oil is mostly traded in US Dollars (USD) on international markets so if the price of Oil rises, aggregate demand for USD increases and Indian importers have to sell more Rupees to meet that demand, which is depreciative for the Rupee.
Inflation has a complex effect on the Rupee. Ultimately it indicates an increase in money supply which reduces the Rupee’s overall value. Yet if it rises above the Reserve Bank of India’s (RBI) 4% target, the RBI will raise interest rates to bring it down by reducing credit. Higher interest rates, especially real rates (the difference between interest rates and inflation) strengthen the Rupee. They make India a more profitable place for international investors to park their money. A fall in inflation can be supportive of the Rupee. At the same time lower interest rates can have a depreciatory effect on the Rupee.
India has run a trade deficit for most of its recent history, indicating its imports outweigh its exports. Since the majority of international trade takes place in US Dollars, there are times – due to seasonal demand or order glut – where the high volume of imports leads to significant US Dollar- demand. During these periods the Rupee can weaken as it is heavily sold to meet the demand for Dollars. When markets experience increased volatility, the demand for US Dollars can also shoot up with a similarly negative effect on the Rupee.