Insights 
VT 
The Indian Rupee (INR) experiences gains partly due to a weaker US Dollar and an anticipated trade deal between the US and India. Meanwhile, elevated crude oil prices and potential foreign outflows from equities pose challenges to the currency.
Consumer inflation in India dropped to a six-year low, prompting expectations that the Reserve Bank of India might extend rate cuts. Market participants focus on forthcoming comments from Federal Reserve officials.
Economic Indicators Show Positive Trends
India’s Manufacturing Purchasing Managers Index (PMI) increased to 58.3 in May, surpassing expectations. Services PMI also improved, leading to higher Composite PMI values, reflecting strong economic activity.
India and the US are expected to finalise the initial phase of their trade deal by July. In the US, Composite PMI and Manufacturing PMI both showed improvement, while jobless claims decreased, staying below market expectations.
The USD/INR pair remains above the 100-day Exponential Moving Average. The upside could reach 86.61 if sustained momentum continues, while downside targets include 85.35 and potentially 84.15.
The Rupee’s performance is affected by external factors like the US Dollar and oil prices. The Reserve Bank of India seeks to maintain a stable exchange rate and inflation target by adjusting interest rates.
Upcoming Challenges And Opportunities
Higher interest rates enhance the Rupee by attracting foreign capital, while macroeconomic dynamics, such as GDP growth and balance of trade, also influence its value. Inflation trends impact the currency, affecting international trade and investment flows.
While the Indian Rupee has seen some modest appreciation, largely driven by softness in the US Dollar and growing optimism over a bilateral trade understanding set to be wrapped up in July, the path ahead is marked by pockets of complexity. Oil prices remain elevated and there’s the likelihood of capital exiting Indian equities, twin pressures that could weigh down the currency over the near term. Pair these with the periodic volatility in the greenback, and the picture becomes more nuanced.
Consumer inflation in India has come down sharply, reaching levels not observed in several years. This deceleration has triggered speculation that the central bank might be more inclined to maintain an accommodative approach for longer. For us, this translates into a lower cost of holding domestic assets, which, in isolation, might not be supportive for the Rupee. However, those same low inflation readings also support discretionary spending and consumption-led growth, which show up positively in GDP data—something foreign investors cannot ignore.
Manufacturing output has been unexpectedly resilient too. The PMI readings are not just numbers—they serve as current indicators of business sentiment and production strength. A strong Services PMI, coupled with rising Composite figures, reinforces the idea that the economy is not simply treading water but making real forward progress. That strength, if it holds, may increase appetite for Indian financial instruments, partially offsetting concerns over foreign equity outflows.
On the other side of the equation, recent US macro releases point to a still-firm domestic economy. Manufacturing and Composite PMIs moved higher—signalling expansion—which may keep Federal Reserve officials cautious about easing policy. Jobless claims have not trended up in a way that would suggest any labour market fragility. Hence, when US policymakers speak over the coming days, attention must be paid to how assertively they push back against expectations of rate cuts. Higher-for-longer interest rates in the US would reinforce the Dollar over a medium-term horizon, tempering near-term Rupee gains.
From a technical perspective, the USD/INR pair holding above the 100-day EMA implies that downward momentum has not fully reasserted itself. The upside risk remains towards the 86.61 region, should further Dollar resilience emerge. On the flip side, if appreciation pressure resumes on the Rupee, a dip towards the 85.35 threshold becomes plausible. But one must be cautious: should rates shift more than expected, 84.15 is not off the table.
As we look at all this data, it’s worth remembering that the Reserve Bank has a dual objective: keeping inflation under control and ensuring currency stability. Their decisions on interest rates act not just as tools for inflation management but also as subtle levers for maintaining exchange rate confidence. A Fed that remains on hold, while India’s inflation softens, could lure carry-seeking investors. However, the draw fades if geopolitical or oil-market strains begin to skew the risk-reward calculus.
Domestic fundamentals like economic expansion, external trade balance, and core inflation will become even more relevant over the next fortnight. If India continues to clock strong export numbers while keeping imports under check thanks to a stronger Rupee and slightly lower oil bills, external stability improves. This in turn buttresses the Rupee. But derisking globally or any unexpected shifts in bond yields—especially in emerging Asia—could spark renewed volatility.
We must stay tightly focused on short-term rate cues, oil futures settlement behaviour, and the sustained ability of India to attract capital via both FDI and portfolio inflows. These parameters are not just broader economic markers but real-time indicators of risk appetite. Being prepared for a faster or slower shift in global yields, particularly those out of North America and Europe, is not optional.
