USD/INR gains as inflation in India cools down again

• The Indian Rupee falls to near 87.90 against the US Dollar as inflation in India grew moderately in July.
• India’s retail inflation rose by 1.55% on year, the lowest level seen in eight years.
• Both the US and China have agreed to extend the tariff truce for 90 days.

The Indian Rupee (INR) declines to near around 87.90 against the US Dollar (USD) during late Indian trading hours on Tuesday. The USD/INR pair gains higher as India’s retail Consumer Price Index (CPI) data has cooled down again.

In July, the retail inflation grew at an annual pace of 1.55%, slower than expectations of 1.76% and the prior reading of 2.1%. This is the lowest level seen since June 2017.

Price pressures undershooting the Reserve Bank of India’s (RBI) inflation target are paving the way for more interest rate cuts this year. The RBI has cut its key Repo Rate by 100 basis points (bps) to 5.5% this year.

In the monetary policy meeting last week, the RBI refreshed CPI projections for the current Financial Year (FY) to 3.1%, down from 3.7% projected earlier. The Indian central bank held the Repo Rate steady.

Broadly, the outlook of the Indian Rupee remains uncertain amid trade tensions between India and the United States (US). Delegates from both nations are scheduled to meet in New Delhi on August 25 for the sixth round of trade talks. Currently, trade relations between both economies are facing turbulence as US President Donald Trump has increased tariffs on imports from New Delhi to 50% for buying Oil from Russia.

Meanwhile, Foreign Institutional Investors (FIIs) resumed their selling spree and sold Rs. 1,202.65 crores worth of equity shares from Indian stock markets on Monday. FIIs’ data on Friday showed an inflow of foreign funds of around Rs. 1,932.81 crores, while foreign portfolio investors remained sellers in all trading days of August.

Daily digest market movers: Indian Rupee falls against US Dollar ahead of US inflation data

• The Indian Rupee underperforms the US Dollar, while investors await the US CPI data for July. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto two-day gains around 98.50.
• Investors will closely monitor the CPI data as it will indicate whether the impact of tariff-driven inflation is one-time or persistent. June’s CPI report showed an increase in prices of products, which are largely imported into the US.
• Economists expect the headline and the core CPI – which excludes volatile food and energy prices – rose at a faster pace of 2.8% and 3.0% on year, respectively.
• Escalating inflationary pressures might force traders to reassess bets supporting interest rate cuts by the Federal Reserve (Fed) in the September meeting.
• According to the CME FedWatch tool, there is an 88% chance that the Fed will cut the Federal Funds Rate by 25 basis points (bps) to the range between 4.00% and 4.25%.
• On the global front, both the US and China have agreed to extend the tariff truce for 90 days. The Chinese Commerce Ministry stated earlier in the day that it is working towards reducing non-tariff barriers to American companies, and will suspend adding some US firms to its unreliable entity and export control lists for 90 days. 

Technical Analysis: USD/INR aims to break above 88.00

USD/INR moves higher to near 87.90 on Tuesday. The near-term trend of the pair is bullish as the 20-day Exponential Moving Average (EMA) slopes higher around 87.24.

The 14-day Relative Strength Index (RSI) oscillates inside the 60.00-80.00 range, suggesting a strong bullish momentum.

Looking down, the 20-day EMA will act as key support for the major. On the upside, the August 5 high around 88.25 will be a critical hurdle for the pair.