Indian Rupee rallies further on RBI's forceful measures to curb USD's demand

The Indian Rupee made further gains against the US Dollar on Wednesday, fueled by the Reserve Bank of India's (RBI) aggressive actions to reduce demand for the USD. By Wednesday's late afternoon, the USD/INR pair had slipped to just below 95.00, the lowest level in over a month. In the weekend leading up to this, the RBI announced several measures, such as a special window for Public Sector Undertaking's (PSU) Oil Marketing Companies (OMCs) to buy US Dollars against crude oil imports, and tighter hedging rules aimed at limiting the USD demand.

Market analysts, however, are doubtful about the sustainability of this near-term rally in the Indian currency due to external pressures. Strategists at OCBC believe the RBI's "increasingly forceful response may help contain near-term INR depreciation pressures," but they remain cautious about expecting a sustained recovery. They note that higher hedging costs could dampen forward USD demand, yet also discourage genuine corporate hedging.

Additionally, the special USD window for oil companies shifts demand away from the spot market rather than reducing India's underlying US dollar requirements. While oil prices have rebounded from their monthly low, the MCX Crude Oil contract is down slightly. Oil-importing economies like India generally underperform in high-oil-price environments.

The Houthi attack on a Saudi state-owned oil firm caused a minor fire. The USD/DXY pair retreated 0.1% to near 102.10, under its yearly high. Investors closely watch the US CPI data to understand the Federal Reserve's (Fed) monetary policy outlook. The US CPI report could indicate a YoY headline inflation of 3.6%, higher than the previous reading of 3.4%.

India's wholesale CPI increased by 11.39% YoY, faster than the previous 9.92%. If India's factory-level inflation rises faster, it could prompt the RBI to consider more interest rate hikes this year. While the USD/INR trades at 94.95 near the 20-day EMA, a break below this level could signal a continued downward trend.