USD/INR forecast ahead of RBI decision, US inflation data

The USD/INR exchange rate is hovering near the highest level since May ahead of the Reserve Bank of India (RBI) decision and US consumer inflation data. It was trading at 82, which was over 1.4% above the lowest level this month.

RBI decision ahead

The USD/INR pair will have two key catalysts on Thursday. First, the Reserve Bank of India will deliver its August decision and provide guidance for what to come. Economists polled by Reuters expect that the bank will leave rates unchanged at 6.50% and the cash reserve ratio at 4.50%. 

If this happens, it will be the fourth straight meeting that the bank has done nothing. The bank started hiking interest rates in August last year when it increased them to 4.40% in a bid to fight the elevated inflation.

The decision comes at a time when India’s inflation is creeping up again. A poll by Reuters showed that the headline inflation jumped above the 6% upper tolerance level of the RBI. Those at HSBC sees inflation dropping to 5% in 2024.

Analysts don’t expect any rate cuts this year even as signs of India’s slowdown emerged. Instead, economists expect that the RBI will start cutting rates in Q1 of 2024.

US inflation data ahead

The next important USD/INR catalyst to watch will be the latest US consumer price index (CPI) data. Economists believe that inflation tilted upwards in July. Precisely, expectations are that the headline CPI rose from 3.0% in June to 3.3% in July. 

Core inflation is expected to come in at 4.8%, a small increase from the previous 4.7% in July. If this is the case, it means that US inflation is still stubbornly high, signaling that the Fed has room for more hikes.

Data compiled by CME shows that the Fed has a 86.50% chance of leaving rates between 5.25% and 5.50% in September,. Another 0.25% hike will likely come if inflation remains high.

USD/INR forecast

The USD/INR exchange rate has been in a strong bullish trend in the past few weeks. As a result, the pair has remained above all moving averages. The current price of 82.80 was the highest level on July 6th. At the same time, the MACD has formed a bearish divergence pattern.

Therefore, as I wrote here last week, the outlook for the USD to INR exchange rate is neutral for now. More weakness of the Indian rupee will see be confirmed if it moves above the key resistance level at 82.92, the highest point on August 8th. The alternative scenario is where the pair drops and retests the support at 82.60.