USD/INR Price News: Indian rupee pares losses below 78.00 on RBI’s rate hike chatters

• USD/INR snaps two-day uptrend while reversing from a fortnight top.
• FPI’s biggest daily sale of Indian bonds in a month, firmer US oil prices weigh on INR.
• Eight-year high inflation pushes RBI towards rate hike, Reuters poll signals 0.50% lift.
• Second-tier US data, risk catalysts are important too.

USD/INR extends pullback from a two-week high while refreshing daily lows near 77.70 during the initial hour of the Indian trading session on Tuesday.

In doing so, the Indian rupee (INR) pair seems to brace for the Reserve Bank of India’s (RBI) rate hike while paying a little heed to the broad US dollar gains and the Foreign Portfolio Investors (FPI) exodus from the Indian markets. The reason could also be linked to the recent risk-positive headlines from China.

That said, an eight-year high Indian inflation brews market chatters of a strong rate hike by the RBI during Wednesday’s meeting. “All 47 analysts in a Reuters poll thought the repo rate would be raised for a second month from 4.40%, but forecasts on the size were split six ways, ranging between 25 and 75 bps,” said Reuters.

The survey adds, “India's bond markets are also bracing for liquidity tightening measures with many analysts predicting a 50 bps increase in the cash reserve ratio for banks as the RBI attempts to return monetary conditions to pre-pandemic levels.”

Furthermore, headlines suggesting optimism in China, the Asian leader, also underpin the INR strength. China Securities Journal (CSJ) praised the country’s virus control and policy stimulus while expecting economic improvement in the second half (H2) of 2022. Previously, Beijing’s ability to overcome the pandemic and citing preparations to recover from the economic loss with faster unlocks joined US President Joe Biden’s likely easy stand for China, as far as showing readiness to remove Trump-era tariffs, seemed to have favored sentiment and test INR bears.

Alternatively, a strong outflow of the foreign funds and firmer oil prices, a major burden on the Indian budget deficit, challenge USD/INR sellers. “Foreign investors step up the sale of Indian government bonds, registering their biggest single-session exit in a month yesterday,” said NewsRise per Reuters.

Additionally, growing chatters over the Fed’s faster/heavier rate hikes, especially after Friday’s US jobs report, also propel the USD/INR prices. A strong US Nonfarm Payrolls (NFP) and the last dose of hawkish Fedspeak before the blackout norm favored the US Treasury yields to snap a three-week downtrend by the end of Friday. As per the latest readings, market players anticipate around 70% chances of the Fed’s 0.50% rate hike in September versus nearly 30% odds favoring such an outcome a week ago.

Looking forward, the US Goods and Services Trade Balance for the said month, forecast at $-89.5B compared to $-109.8B in previous readouts, can entertain intraday traders but major attention will be given to Wednesday’s RBI verdict and Friday’s US Consumer Price Index (CPI).

Technical analysis

A daily closing beyond 77.85 appears necessary for the USD/INR bulls to aim for the record top near 78.15, marked in May. Meanwhile, 77.35 and March’s high near 77.17 limits the short-term downside of the pair.