Indian Rupee gains ground despite fears of more Fed interest rate hikes

The Indian Rupee (INR) experienced a slight uplift against the US Dollar (USD) during the early trading session, following a weak opening on Thursday. According to a report by Reuters, the central bank of India may have intervened to curb the depreciation of the Rupee. Traders indicated that state-run banks were seen offering US dollars, presumably on behalf of the Reserve Bank of India (RBI).

The RBI's intervention was highly probable as the USD/INR pair was expected to open robustly, in response to the hawkish interest rate decision by the Federal Reserve (Fed) on Wednesday, which propelled the US Dollar to significant gains. As of now, the US Dollar Index (DXY), which measures the Dollar's worth against six major currencies, is trading close to its six-week high of 100.37.

On Wednesday, the Fed broke its five-meeting streak of holding rates, increasing interest rates by 25 basis points (bps) to the range of 3.75%-4.00%. Fed Chairman Kevin Warsh did not provide any insights on the monetary policy outlook, but cautioned of persistent high inflation. "Inflation is too high and has been for too long," Warsh declared.

The Fed's dot plot, which outlines the collective expectations of policymakers for medium and long-term Federal Fund Rates, indicated that 16 out of 18 policymakers anticipate at least one rate hike this year. Economists at NBC Economics and Strategy believe that the revised dot plot suggests "relatively strong backing for more restrictive monetary policy for an extended period."

They argue that the Fed does not foresee a return to the 3.5%-3.75% range until the end of 2029, highlighting a higher-for-longer policy bias. NBC's team estimates a "4.25% peak for what could be a brief tightening cycle," with the exact timing and extent of future cuts contingent on the sustainability of the economic expansion (i.e., the AI boom).

Financial markets are starting to factor in the likelihood of the RBI initiating a monetary tightening cycle to address rising inflationary pressures. Recent data from India's retail Consumer Price Index (CPI) shows a steady increase in inflation over the past 10 months, with the YoY inflation rate reaching 4.82% in August. This surge bolsters the case for an interest rate hike in the near term.

MUFG analysts suggest that "a gradual broadening of price pressures is expected to maintain headline inflation above 5% in the second half of the fiscal year," supporting a tighter policy bias. MUFG further notes that "recent developments, including a sustained rise in crude prices, tightening global financial conditions, robust domestic growth, and indications of broadening core pressures, reinforce the case for a modest 50-bp hike in the second half of FY27," making the RBI's meeting in October a significant one.

In the daily chart, USD/INR is trading at 95.82 and maintains a bullish stance above the 20-day exponential moving average (EMA) at 95.41, as the price climbs from last week's lows. The Relative Strength Index (RSI) at 59.9 is in a positive range, indicating constructive upside momentum without signs of exhaustion yet. On the downside, immediate support can be found at the 95.80 level, where the present price acts as a short-term pivot, with stronger demand near the 20-day EMA at 95.41. Looking ahead, the pair targets the all-time high near 97.00.