The Indian rupee’s remarkable collapse continued as the USD/INR exchange rate jumped to a record high of 85.73. It has risen in the last eight consecutive weeks as odds of a more dovish Reserve Bank of India (RBI) coincided with a modestly hawkish Fed. So, how high can the USDINR pair get?
Strong US dollar index
The USD/INR exchange rate has been in a strong uptrend as the Indian rupee and other emerging market currencies slumped. It has jumped from 68.35 in 2019 to near 86 today, a trend that analysts expect will continue.
The pair’s jump is mostly because of the ongoing strength of the US dollar index rally continued. It has soared to a high of $109, its highest level in more than two years, with the currency weakening against most currencies.
The dollar has jumped because of the health of the US economy. Most economists expect that the economy expanded by between 2.5% and 2.7% in 2024, bringing the post-pandemic growth to about 12%.
The economy has grown because of the robust spending by the government, which has helped to push the public debt to over $36.3 trillion. Consumer spending has also been strong, which explains why credit card default rates are in a strong uptrend.
The Federal Reserve has predicted that it will be more hawkish in 2025 as it readjusts to Donald Trump’s policies. Trump has promised to deport millions of illegal immigrants, slash taxes, cut regulations, and impose tariffs.
The Fed believes that some of these policies will be highly inflationary and has adjusted its view by pointing to just two cuts this year. It is now more focused on inflation instead of the labor market, which it believes is strong.
The next important economic data to watch will be the upcoming US nonfarm payroll (NFP) data on Friday. Economists expect the data to show that the economy created 150k jobs as the unemployment rate remained at 4.2%.
RBI potential interest rate cuts
The USD/RUB pair has soared as investors anticipate the potential RBA interest rate cuts after President Modi replaced the hawkish Shaktikanta Das with Sanjay Malhotara.
He replaced the RBI chief after data revealed that the economy slowed in the third quarter. It expanded by less than 6% in the third quarter. Analysts now expect that the economy likely grew by below 7% in 2024, with many expecting it to remain between 6.4% and 6.8%.
Therefore, there is a likelihood that Malhotara will prioritize India’s growth at the expense of inflation, which has held steady in the past few months. The headline Consumer Price Index (CPI) rose by 5.48% in November. While the CPI figure was lower than October’s 6.21%, it was higher than last year’s low of 3.54%.
The RBI will likely slash rattes in the the first quarter. The risk, however, is that lower rates will lead to more USD/INR upside in the near term.
Fortunately, the RBI has more measures to intervene in the forex market, helped by its $640 billion in forex reserves.
USD/INR technical analysis
USD/INR price chart | Source: TradingView
The USD to INR exchange rate has been in a strong bull run in the past few years. It recently crossed the important resistance level at 85, and the upper side of the ascending channel shown in red.
The pair has remained above the 50-week and 25-week Exponential Moving Averages (EMA), a popular bullish sign. Also, the Relative Strength Index (RSI) has moved to the extremely overbought level at 85. The Stochastic Oscillator has also jumped to the overbought point.
Therefore, the pair may dip in the next few weeks as the RBI intervenes. If this happens, it may retest the key support at 85.
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