May 8, 2025
New Delhi, India
USDINR Analysis
The Indian Rupee continued its downward trend for the third straight session on Thursday, slipping to 84.66 against the US Dollar amid weakening market sentiment triggered by the Federal Reserve’s cautious policy tone and heightened geopolitical tensions with Pakistan.
Fed’s Outlook Fuels Risk Aversion
As expected, the Fed held interest rates steady at 4.25%–4.50% but flagged growing risks to both inflation and employment. This injected fresh uncertainty into global markets and lent support to the US Dollar. Although the Dollar Index (DXY) retraced slightly to 99.70, traders expect it to rebound given the Fed’s ‘wait-and-see’ stance.
Fed Chair Jerome Powell cautioned that trade tariffs could complicate inflation and job goals in 2025, indicating potential delays in future rate adjustments. Market sentiment also turned cautious ahead of upcoming trade talks between US and Chinese officials in Geneva.
INR Under Pressure from Operation Sindoor Fallout
The rupee also felt the heat from renewed India-Pakistan hostilities. India recently launched “Operation Sindoor,” targeting nine terror hubs in Pakistan, including those in PoK, following a deadly attack in Kashmir. Since then, intense artillery exchanges have erupted along the Line of Control, adding to regional risk aversion and weighing on the INR.
Bond Market Sees Relief
Despite the forex pressure, Indian bond markets found support. The 10-year G-Sec yield eased to around 6.33% amid hopes that the Reserve Bank of India (RBI) will intervene to stabilize markets and support growth. Analysts expect yields to hover between 6.30%–6.40% this week, buoyed by surplus liquidity and RBI’s open market operations.
Growth, Inflation in Focus
Macroeconomic indicators showed India’s GDP growth slowing to 6.5% from 8.2%, while inflation in March fell to its lowest in five years, well below the RBI’s 4% mid-point target. This has shifted the policy focus toward growth support, raising expectations of future rate cuts.
PMI Signals Resilience
On the brighter side, HSBC’s India Composite PMI for April came in at 59.7, confirming 45 consecutive months of private sector expansion. The Services PMI was revised to 58.7, still above March’s reading, reflecting continued strength in the services economy.
The rupee’s short-term outlook remains pressured by global and regional headwinds. While cross-border tensions and Fed-induced caution weigh heavy, easing inflation and robust domestic indicators offer some cushion—provided geopolitical risks don’t escalate further.
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