US Dollar’s continued weakness drives further gains in Indian Rupee

• A sharp rise in the Indian Rupee against the US Dollar follows Tuesday’s holiday.
• The US Dollar faces pressure from worries over AI growth and a reassessment of Fed expectations.
• Support for the Indian currency remains a priority for the RBI.

A sharp opening gain in the Indian Rupee (INR) against the US Dollar (USD) on Wednesday pushes USD/INR to a fresh six-week low near 96.30. Trading resumes after the previous day’s holiday, with persistent US Dollar weakness weighing on the pair.

Despite trading almost unchanged around 101.77 at the time of writing, the US Dollar Index (DXY) remains near the nearly three-week low of 101.50 reached the previous day. The index measures the Greenback against six major currencies.

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 put the US Dollar under pressure. Market participants anticipate further declines in the currency as these headwinds persist.

Could Fed repricing and mounting tech concerns extend the USD decline?

Citing last week’s “heavy net losses for the DXY”, Scotiabank strategists say “broad USD weakness looks poised to extend in the short run as markets reassess near-term Fed tightening risks,” and view those losses as evidence that the “Sep/Oct rally in the index is poised to correct or reverse, potentially towards the 100.80/101.30 area at least.” In their assessment, “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,” implying that fresh selling in the sector may strengthen the Dollar’s prevailing 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 possibility of a rate increase at the October meeting too. Hawkish Fed wagers were scaled back after several officials signalled that another interest-rate hike was not urgent.

Can the RBI’s multi-layered defence keep the rupee stable?

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

Several headwinds nevertheless leave DBS doubtful about the scope for lasting INR gains. Despite the recent measures to support the Rupee, the economists say “we see limited room for sustained INR appreciation on grounds of manufacturing/trade competitiveness.” They also highlight the currency’s “high sensitivity to oil price movements and risk sentiments.” Against that backdrop, they add that “a challenging portfolio flows outlook leaves the door open to further gradual rupee depreciation subject to global developments,”.

USD/INR Technical Analysis: Can Oversold Conditions Limit Further Losses?

Selling pressure continues to shape USD/INR’s near-term outlook on the daily chart, with the pair at 94.5625, well beneath the 20-period Exponential Moving Average (EMA) of 95.5079. A sharp retreat from recent highs has left the Relative Strength Index (RSI) at an oversold 28.47. Rather than signalling a clear recovery, however, that reading merely points to stretched downside momentum, while overhead trend resistance continues to constrain price action.

Any rebound would likely encounter fresh selling at the first resistance level, the 20-period EMA near 95.51. Although no distinct price-based support has emerged near current levels, an RSI around 28 indicates that sellers could begin to lose conviction in further declines. Stabilisation above 94.56 would be needed to ease the risk of a prolonged fall.

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