Indian Rupee extends decline on fresh escalation in hawkish Fed bets
- The Indian Rupee falls further against the US Dollar.
- An increase in hawkish Fed bets due to a hot US PPI report becomes a new concern for the Indian currency.
- Investors await the CPI data from both the US and India.
The Indian Rupee (INR) extends its downward spiral against the US Dollar (USD) for the fourth trading day on Friday, with the USD/INR pair rising to near 95.80 in the opening session. A weak opening was already anticipated for the Indian currency against the US Dollar as the latter attracted significant gains overnight after the release of the stronger-than-projected United States (US) Producer Price Index (PPI) data for August, which lifted Federal Reserve (Fed) interest rate hike expectations.
At press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades firmly near Thursday’s high at around 99.20.
Strong US PPI data boosts hawkish Fed bets
The US PPI report on Thursday showed that headline producer inflation arrived higher at 5.4% Year-on-Year (YoY) vs. 5.3% estimates and the July reading of 4.8%. The core PPI - which excludes volatile food and energy items – also grew at a faster pace, arriving at 4.6% YoY, as expected, compared to the previous reading of 4.3%.
Hot US PPI figures lifted Fed interest rate hike expectations. According to the CME FedWatch tool, the odds of the Fed raising interest rates at the policy meeting next week have increased to 72.4% from 61.2% seen before the data release.
Theoretically, a fresh increase in hawkish Fed expectations boosts US Treasury Yields, which ultimately diminish the appeal of riskier assets. As of writing, 10-year US Treasury Yields hit record highs at 4.98%, the highest level seen since November 2023.
US inflation risks seen skewed higher as core eases modestly
After the US PPI data, investors are awaiting the Consumer Price Index (CPI) report for August, which will be published at 12:30 GMT.
According to economists at TD Securities, US price pressures likely moderated only slightly in August. They “project that core CPI rose 2.3% on a y/y basis, down 10 bps vs July, while headline inflation likely stayed unchanged at 3.4% y/y.” However, they caution that “we see the risks to our forecasts as skewed to the upside given that we're assuming a number of large price declines in tariff-exposed goods categories,” suggesting the outturn could surprise higher if those assumed declines fail to materialize.
India’s CPI data to be key trigger for INR
On the domestic front, India’s retail CPI data for August scheduled for Monday could be the key trigger for the Indian Rupee.
Economists at Societe Generale expect India’s inflation backdrop to turn less comfortable in the near term, projecting that "India's CPI inflation [will] rise to around 4.8% yoy in August 2026, up from 4.4% in July, marking the highest reading under the newly launched CPI series." They note that, if realized, "this would represent the third consecutive month of inflation above the RBI's 4.0% target, further reinforcing the view that inflationary pressures are no longer confined to a few volatile categories but are gradually becoming more broad-based."
Regarding the drivers, Societe Generale highlights that "food inflation is likely to have exceeded 6.0% yoy in August and should remain the single largest contributor to headline CPI," with available price trends pointing to "continued pressure from categories such as sugar, cereals, milk, eggs, edible oils and selected vegetables." A "second source of upward pressure is likely to come from fuel inflation," as "elevated global energy prices, coupled with the lagged effects of earlier domestic fuel price adjustments, suggest that the fuel basket should continue to exert upward pressure on headline inflation." The bank also points out that "with input price pressures remaining elevated and little evidence of relief from global commodity markets, the risk of broader pass-through into consumer prices appears to be rising," while survey-based measures "point toward firmer fuel inflation in August relative to July."
Taken together, Societe Generale argues that "the August CPI print is likely to signal that India's inflation dynamics are becoming less benign. Food inflation remains elevated, fuel inflation continues to firm, and early signs of broader cost pass-through are beginning to emerge." In their view, "a print around 4.8% yoy would not only mark a new high under the revised CPI series but would also reinforce concerns that inflationary pressures are gradually broadening beyond a narrow set of categories."
USD/INR Technical Analysis
In the daily chart, USD/INR trades at 95.80, holding a constructive bullish bias as it remains above the 20-day exponential moving average (EMA) at 95.22. The pair has rebounded firmly from late-August lows and now trades comfortably over its short-term trend proxy, while the Relative Strength Index (14) near 60 suggests positive but not yet overbought momentum supporting further upside attempts.
On the downside, initial support is located at the 20-day EMA at 95.22, where buyers are likely to re-emerge on dips to defend the nascent uptrend. Looking up, the pair could extend its advance toward the all-time high near 97.10.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.