USD/INR forecast: Here’s why the Indian rupee could rebound

The Indian rupee collapsed to a record low this week as the world came to terms with the new Donald Trump election and the Federal Reserve interest rate decision. The USD/INR exchange rate peaked at 84.38 on Thursday, its highest up by almost 2% from its lowest level this year.

Federal Reserve decision

The USD to INR exchange rate continued its strong rally after the Federal Reserve delivered its second-last interest rate decision. In it, as was widely expected, the bank opted to cut rates by 0.25%, bringing it to between 4.5% and 4.75%. 

The committee also noted that the labor market was its biggest concern, especially after last week’s data. According to the Bureau of Labor Statistics (BLS), the economy created just 12,000 jobs last month, a bg miss from the widely expected 110k.

At the same time, US inflation has made substantial improvements after falling from double digits in 2022 to almost 2% today. The most recent consumer price index (CPI) and personal consumption expenditure (PCE) data came in at 2.4% and 2.3%%, meaning that they were moving in the right direction.

The Fed pointed to more gradual interest rate cuts going forward, with the CME FedWatch tool estimating that rates would drop by another 0.25% in December. In a note, analysts at ING said:

“The prospects of looser fiscal and less dovish Fed policy through 2025 should limit the downside to both the dollar and especially long-dated US Treasury yields over the coming weeks and months.”

US election and India

The USD/INR exchange rate also surged as the US dollar demand rose after Donald Trump won the US election this week.

Unlike Kamala Harris, Trump is expected to be more disruptive because of his economic policies, including more tax cuts and deregulation.

Trump has also pledged to change how the US does trade by implementing large tariffs. His biggest ire will be on China, the second-biggest trading partner, which he has pledged to hike tariffs to 60%.

Another trade war between the US and China would benefit low-cost manufacturing countries like India and Mexico. Besides, many large manufacturers in China have already started moving to India.

Most notably, Trump is a more transactional president, and he has a friendly relationship with Narendra Modi. As such, there is a likelihood that the Indian economy will do well during his term.

The USD/INR pair will next react to December’s Reserve Bank of India (RBI) interest rate decision. Analysts expect that the bank will maintain higher rates for longer because of the stubbornly higher inflation rate. 

The most recent economic data showed that the headline Consumer Price Index (CPI) rose from 3.65% in September to 5.9% in October as food inflation remained stubbornly high. As such, rate cuts would worsen the situation.

The Fed and RBI divergence has, therefore, led to a carry trade opportunity where people borrow from  a low-rate country and invest in a high rate one. In this case, they are borrowing the US dollar to invest in the rupee.

USD/INR technical analysis

The daily chart shows that the USD/INR pair has been in a strong bullish trend in the past few weeks. It surged to a record high of 84.38 this week, crossing the previous all-time high at 84.14. 

The pair has remained above the 50-day and 25-day Exponential Moving Averages (EMA), meaning that buyers are in control for now. It has also risen above 84.14, the upper side of the inverse head and shoulders pattern.

At the same time, it has formed a shooting star candlestick pattern, a popular reversal sign. Therefore, there are signs that it will drop and retest the key support at 84.15. A move above the upper side of the shooting star will point to more weakness.

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