- The USD/INR gives up initial gains and falls to near 85.70 even as the RBI has cut its Repo Rate by 50 bps to 5.5%.
- The RBI has changed its stance from accommodative to neutral.
- Investors await the US NFP data for May.
The Indian Rupee (INR) flips against the US Dollar (USD) to near 85.70 during European trading hours on Friday after the Reserve Bank of India’s (RBI) monetary policy announcement. The initial reaction from the USD/INR pair was positive after the RBI front-loaded interest rate cuts to boost economic growth.
Indian central bank reduced the Repo Rate by 50-basis points (bps) to 5.5%, with a 5-1 vote split, in which policymaker Saugata Bhattacharaya endorsed a regular cut of 25 bps. This was the third straight interest rate cut by the RBI, however, the reduction was larger than usual of 25 bps. Surprisingly, the RBI has also cut the Cash Reserve Ratio (CRR) by 100 bps to 3%, a move that will potentially unleash Rs. 2.5 lakh crore liquidity into the banking system for advances.
RBI Governor Sanjay Malhotra has stated that a jumbo rate cut was needed to stimulate economic growth. “Front-loading rate cuts to support growth were felt necessary,” Malhotra said.
Meanwhile, the RBI has changed its policy stance from “accommodative” to “neutral”, citing that the MPC has “limited scope to cut rates further”. Typically, a neutral stance suggests that the next monetary policy decision could be on either side.
An unexpected jumbo rate cut is expected to widen the policy divergence with other central banks, potentially keeping the INR on the backfoot in the near-to-medium term.
On the inflation front, the RBI has revised inflation guidance for FY26 to 3.7% from 4.0% projected earlier and has signaled that the battle against inflation has won. However, he has expressed concerns that the last leg of inflation appears to be stickier. “Last mile of inflation turning out a little more protractive,” Malhotra said. The central bank has maintained growth guidance at 6.5% for the current financial year.
Daily digest market movers: Investors await key US NFP data
- The sidewaye move in the USD/INR pair is also driven by the US Dollar, which is trading calmly ahead of the United States (US) Nonfarm Payrolls (NFP) data for May, which will be published at 12:30 GMT. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to late-Thursday’s recovery move around 98.80.
- Investors will pay close attention to the US official employment data as it will influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook.
- The probability for the Fed to reduce interest rates in the July policy meeting has slightly increased after disappointing US ADP Employment Change and an unexpected contraction in the Services PMI for May, released on Wednesday. According to the CME FedWatch tool, the odds of the Fed cutting its borrowing rates in July have increased to 32.8% from 22.5% seen a week ago.
- Contrary to a slight increase in Fed dovish bets, officials have signaled that interest rates should remain at their current levels for longer as tariffs have prompted upside risks to inflation for an uncertain period. Kansas City Fed President Jeff Schmid said on Thursday that tariffs are likely to “push up prices by an unknown amount in coming months”, Reuters reported. Schmid added that the “likely effect will not be fully apparent for some time.” His comments suggested that he was a little concerned about the economic growth and employment. “The extent of the tariffs’ drag on growth and employment is unclear, but I’m optimistic that economic activity can be sustained,” Schmid said.
- The US NFP report is expected to show that the economy added 130K fresh workers, slightly lower than 171K hired in April. The Unemployment Rate is seen as steady at 4.2%. Meanwhile, Average Hourly Earnings, a key measure of wage growth, is estimated to have grown moderately by 3.7% on year, compared to the prior reading of 3.8%. On month, the wage growth measure is expected to have risen by 0.3%, faster than 0.2% in April.
- On late Thursday, the US Dollar recovered sharply after US President Trump expressed optimism in a post on Truth.Social that there will be harmony in trade negotiations between Washington and Beijing. “The call lasted approximately one and a half hours and resulted in a very positive conclusion for both countries. “There should no longer be any questions respecting the complexity of rare earth products,” Trump wrote.
Technical Analysis: USD/INR stays above 20-day EMA
The Indian Rupee slides to near 86.00 against the US Dollar on Friday. The near-term trend of the pair is already bullish as it holds the 20-day Exponential Moving Average (EMA), which trades around 85.47.
The 14-day Relative Strength Index (RSI) wobbles around 60.00. A fresh bullish momentum would come into action if the RSI breaks above that level.
Looking up, the pair could revisit an over 11-week high around 86.70 after breaking above the May 22 high of 86.10. On the downside, the June 3 low of 85.30 is a key support level for the major. A downside break below the same could expose it to the May 26 low of 84.78.