Indian Rupee cushioned by RBI’s likely intervention, outlook remain fragile

The Indian Rupee (INR) experienced a brief boost against the US Dollar (USD) on Friday, as the pair struggled to surpass the 95.96 level. Traders indicated that the Reserve Bank of India (RBI) may have intervened by selling US Dollars ahead of the local market opening. However, this short-term strength appears to be waning as US Treasury Yields continue to rise due to increased energy prices and the Federal Reserve's anticipated sustained interest rate hikes.

The MCX Crude Oil contract, expiring on October 19, declined 2.3% to around Rs. 8,950, while 10-year US Treasury Yields approached their 19-year high of 5.23%. Analysts from MUFG believe that the "dominant market theme remains the relentless rise in US yields and the renewed repricing of Fed expectations." They predict that the US 2-year Treasury yield will climb to around 4.9%, with the 10-year yield exceeding 5.0% and the 30-year yield surpassing 5.4%.

This economic resilience raises the likelihood of further Fed tightening, potentially reaching 37 basis points by December 2026, or roughly 1.5 rate hikes by the end of the year. Meanwhile, India's August inflation climbed to 4.8% year-over-year, a significant increase from the revised 4.5% in the previous month. Analysts emphasize that this uptick in price pressures is likely to keep headline inflation above 5% throughout the second half of the fiscal year, necessitating a tighter policy stance.

The current bullish bias in USD/INR is supported by the pair's position above the 20-day exponential moving average (EMA) at 95.6104. Should a pullback occur, the 20-day EMA could act as initial support. External factors such as crude oil prices, the US Dollar's value, and foreign investment levels significantly impact the Rupee's value.

The RBI intervenes in foreign exchange markets to maintain a stable exchange rate, adjusts interest rates to control inflation, and influences the Rupee's value through the 'carry trade' mechanism and macroeconomic factors like inflation, interest rates, economic growth, and the balance of trade.