Indian Rupee faces pressure from higher bond yields, FIIs outflow

On Tuesday, the Indian Rupee (INR) opened lower against the US Dollar (USD) as global bond yields surged. The USD/INR pair climbed to nearly 96.43, its highest level in over two months. US 10-year Treasury yields increased by 0.24% to around 5.32%. Rising bond yields typically create a risk-averse market, which can diminish the attractiveness of riskier assets like the Indian Rupee.

Additionally, a continuous outflow of foreign funds from the Indian stock market is also impacting the Indian currency. In the first two trading days of October, Foreign Institutional Investors (FIIs) withdrew Rs. 14,183.36 crore from the Indian market. US-backed securities have been experiencing significant yield increases for months due to concerns over persistent global inflationary pressures caused by the Middle East war.

Even with weaker-than-expected US Nonfarm Payrolls data for September, traders are scaling back expectations of a hawkish Federal Reserve (Fed) interest rate hike. Societe Generale analysts note that while softer US payrolls have reduced the likelihood of near-term Fed tightening, they believe it does not signal a major shift in the Federal Reserve's interest rate trajectory, as inflation will remain a significant concern.

For the Rupee, analysts at MUFG/BTMU predict that the Reserve Bank of India (RBI) will likely maintain rates on hold, although they anticipate the bank to start a tightening cycle from December. They believe there is a good chance the central bank could also move its stance from neutral to indicate a tightening bias, even if the near-term decision remains unchanged.

In the daily chart, USD/INR is trading at 96.4155, which has broken above the 20-period exponential moving average (EMA) at 95.9131 and maintains a near-term bullish bias. Support is at the 20-period EMA around 95.91, where a pullback could lead to fresh buying interest if the level holds. Technical analysis indicates a strong but increasingly stretched upside momentum, with the 14-period Relative Strength Index (RSI) at 68.07, just below the overbought threshold.

The Rupee is highly sensitive to external factors, such as crude oil prices, the value of the US Dollar, and foreign investment levels. The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate and control inflation, which is targeted at 4%. Factors like economic growth, the balance of trade, and foreign investment inflows also influence the Rupee's value.