The USD/INR exchange rate was highly volatile last week as the market reflected on Donald Trump’s trade war with the rest of the world. The pair initially crashed to 84.95, its lowest level since December 23, and then bounced back to 85. This article explores what to expect this week as the Reserve Bank of India (RBI) delivers its rate decision.
Indian bond yields crash ahead of the RBI interest rate decision
The RBI will be the only central bank set to deliver its monetary policy decision this week. This will be a closely-watched decision as it comes at a time when the Indian inflation is falling and the economy is slowing.
The most recent data showed that the headline Indian Consumer Price Index (CPI) dropped to 3.6% in February from 4.26% a month earlier. This decline was lower than the median estimate of 4%. It was also the lowest level in months.
The RBI decision also comes as the world comes to terms with the Trump Liberation Day tariffs announced last week. India, a top US trading partner, received a 26% tariff that will affect goods worth billions of dollars.
Therefore, most analysts believe that a combination of uncertainty and falling inflation will push the RBI to deliver a 25 basis point interest rate cut. It will be the second consecutive cuts this year after it slashed by 0.25% in February.
The rising odds of the upcoming RBI rate cut explain why investors have piled into Indian bonds, pushing their yields lower. The ten-year yield has crashed from the post-pandemic high of 7.61% to 6.46%, its lowest level since January 2022.
Similarly, the 5-year yield has plummeted for six consecutive weeks, reaching a low of 6.30%, its lowest level since April 2022.
Analysts believe that the trade war will leave the Indan economy worse off. In this, it will likely not hit the RBI target of 6.7% and the government estimate of 6.3%. Goldman Sachs analysts see the economy growing by between 6.1% and 6.3%, while Citi sees it growing by 6.0%.
FOMC minutes, US inflation data
The USD/INR exchange rate will react to the upcoming Federal Reserve minutes that will come out on Wednesday. These minutes will provide more information about the last monetary policy meeting and what to expect later this year.
The other key data to watch will be the US inflation report that comes out on Thursday. Economists expect the headline CPI to come in at 2.5%, lower than the previous 2.8%. Core inflation is expected to come in at 3.0% from the previous 3.1%.
While these events are important, their impact on the USD/INR will be limited because the world is a significantly different place today than it was two weeks ago.
USD/INR technical analysis
The daily chart shows that the USD to INR exchange rate has stabilized in the past few days. It has rebounded from last week’s low of 84.95 to 85.4820.
The pair remains significantly below the 50-day and 100-day Exponential Moving Averages (EMA). It is also hovering at the 50% Fibonacci Retracement levels.
Therefore, the USD/INR exchange rate will likely remain under pressure this week. The top levels to watch will be at 84.95 and 85.95. A drop below the support at 84.95 will point to more downside, potentially to the 61.8% retracement level at 84.68.
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