USD/INR Edges Lower Amid Rising Odds of Aggressive Fed Rate Cut

September 13, 2024

New Delhi, India

USD/INR

The USD/INR pair traded slightly lower on Friday, continuing its downward movement from the previous session as recent US economic data reinforced expectations of an aggressive interest rate cut by the Federal Reserve (Fed) at its upcoming meeting. The CME FedWatch Tool shows a sharp increase in the probability of a 50 basis point (bps) rate cut, now at 41%, up from 14% a day earlier.

Key Influences on USD/INR:

1. Fed Rate Cut Expectations:
   • Markets are fully pricing in at least a 25 bps rate cut by the Fed in September, with the likelihood of a more significant 50 bps cut now at 41%. This dovish stance has weighed on the US Dollar, providing some support to the Indian Rupee.
2. India’s CPI Data:
   • India’s Consumer Price Index (CPI) rose 3.65% in August, slightly above the expected 3.55% and July’s 3.54%, driven by a sharp rise in vegetable prices. This higher-than-expected inflation may influence the Reserve Bank of India’s (RBI) monetary policy stance.
3. RBI’s Market Intervention:
   • On Thursday, reports indicated that the RBI might have intervened in the foreign exchange markets to prevent the Rupee from weakening beyond the 84.00 level. Traders are now closely watching the upcoming release of India’s trade deficit data and foreign exchange reserves on Friday.
4. US Economic Indicators:
   • The US Producer Price Index (PPI) rose 0.2% month-on-month in August, exceeding forecasts, while core PPI accelerated to 0.3%. US initial jobless claims also increased slightly to 230K for the week ending September 6.
5. India’s Economic Growth Outlook:
   • RBI Governor Shaktikanta Das, speaking at the Bretton Woods Committee’s Future of Finance Forum, expressed confidence in India’s growth potential, estimating it at 7.5% or more, slightly above the central bank’s full-year forecast of 7.2% for 2024.
6. Other Economic Developments:
   • India’s Industrial Output rose by 4.8% in July, slightly surpassing expectations of 4.7%. The government is considering relaxing investment rules for Chinese firms and easing visa issuance for Chinese nationals to stimulate local manufacturing, amid a growing trade deficit with China.
7. US Inflation Data:
   • US Consumer Price Index (CPI) fell to 2.5% year-on-year in August, below the expected 2.6%, while the core CPI remained stable at 3.2% YoY. The data suggest easing inflationary pressures, contributing to the Fed’s potential rate cut.

The USD/INR is under pressure as markets anticipate an aggressive rate cut by the Fed, coupled with a slightly higher-than-expected inflation rate in India. Traders are closely monitoring further economic data releases from both countries to gauge the next moves for the currency pair.