Indian Rupee extends gains amid further US Dollar weakness

• Following Tuesday’s holiday, the Indian Rupee rises sharply against the US Dollar.
• AI growth concerns and a reassessment of Fed policy expectations put the US Dollar under pressure.
• Support for the Indian currency continues from the RBI.

A fresh six-week low near 96.30 marks Wednesday’s trading in USD/INR as the US Dollar (USD) continues to underperform. Following the previous day’s holiday, the Indian Rupee (INR) opens sharply stronger against the Dollar.

At around 101.77 at the time of writing, the US Dollar Index (DXY) is little changed. The index, which measures the Greenback against six major currencies, nevertheless remains near the almost three-week low of 101.50 recorded the day before.

Weakness in United States (US) Artificial Intelligence (AI)-related shares, alongside a correction in US bond yields as Federal Reserve (Fed) expectations are repriced, has weighed on the US Dollar. Market participants expect these headwinds to drive further losses in the currency.

USD faces further losses as Fed expectations shift and technology concerns mount

Citing last week’s “heavy net losses for the DXY”, Scotiabank strategists argue that “broad USD weakness looks poised to extend in the short run as markets reassess near-term Fed tightening risks,” and that the “Sep/Oct rally in the index is poised to correct or reverse, potentially towards the 100.80/101.30 area at least.” The strategists also warn that “a deeper shake out in tech stocks could become a further headwind for the USD, given the dominance of the AI build out in the US growth/inflation narrative,” indicating that fresh weakness in the sector may add to the Dollar’s existing downtrend.

An unchanged interest rate decision at the Fed’s policy meeting later this month is now almost certain, according to the CME FedWatch tool. By contrast, a month earlier the tool indicated a meaningful probability of a rate increase at the October meeting too. After several officials signalled that another rate rise was not urgent, traders scaled back their hawkish Fed expectations.

RBI reinforces its multi-layered defence to stabilise the rupee

A “multi-layered defence strategy to support the rupee this year” has been adopted by the Reserve Bank of India (RBI), according to economists at DBS Group Research. They describe a combination of “outright intervention in spot/forwards, regulatory action, liquidity steps, administrative measures and moves to curb import-related dollar demand.” DBS believes the authorities are “likely not done yet and remain ready to take further action, as required,” a resolve reinforced by RBI Governor Malhotra in a recent interview: “The RBI is determined to do whatever is necessary to ensure orderly movement in the foreign exchange market.”

Despite those measures, several headwinds leave DBS sceptical about a sustained rise in the INR. Assessing recent policy efforts to support the Rupee, DBS states that “we see limited room for sustained INR appreciation on grounds of manufacturing/trade competitiveness.” The economists also flag the currency’s “high sensitivity to oil price movements and risk sentiments.” In their view, “a challenging portfolio flows outlook leaves the door open to further gradual rupee depreciation subject to global developments,”

USD/INR Retains a Bearish Technical Bias

With USD/INR trading at 94.5625 on the daily chart, the near-term outlook remains bearish: spot is well beneath the 20-period Exponential Moving Average (EMA) of 95.5079. A sharp retreat from recent highs has taken the Relative Strength Index (RSI) to an oversold reading of 28.47. Rather than signalling a clear recovery, however, the indicator merely suggests that the decline is stretched, with overhead trend resistance still limiting price action.

Any rebound is likely to encounter fresh selling at the first resistance area, the 20-period EMA near 95.51. Although no distinct price-based support has emerged near current levels, an oversold RSI around 28 indicates that sellers could begin to lose conviction if the pair falls further. Stabilisation above 94.56 would be needed to lessen the risk of a prolonged decline.

(The technical analysis of this story was written with the help of an AI tool. Know more.)