USD/INR forecast: Rupee outlook as Indian bond yields jump

The USD/INR exchange rate continued its recovery this year, moving from a low of 83.77 in May last year to the current 91. This recovery continued this week as Indian bond yields and business activity rose. 

Indian bond yields and business activity are rising 

The USD to INR exchange rate rose on Friday as India published encouraging macro data, which will likely continue improving in the coming months.

Data released by HSBC showed that the manufacturing PMI rose from 55.4 in January to 57.5 in February, a sign that the manufacturing sector is improving.

The report also showed that the services PMI rose to 58.4, while the composite figure rose to 59.3, its highest level in months. A PMI figure above 50 is a sign that a sector is growing.

Meanwhile, the bond market came under pressure as energy prices jumped, raising concerns about inflation. The ten-year rose to 6.73%, its highest level since February 12. Similarly, the 30-year rose to 7.43% and is nearing the year-to-date high of 7.515%.

Indian bond yields jumped because of the ongoing crude oil price rally because of the elevated concerns that Donald Trump will attack Iran in the coming days. In a statement, he warned Iranian officials to reach a deal in the next 15 days.

A US attack on Iran will have a major impact on crude oil prices, a move that will impact India, a country that imports all its oil.

Higher oil prices may impact India’s manufacturing sector and inflation. Indeed, a report released recently showed that inflation has moved upwards in the last few months. 

The headline Consumer Price Index (CPI) rose to 2.75% in January from 1.33% in December. It has jumped from last year's low of 0.25%. It remains inside RBI’s tolerance band between 2% and 4%.

The Indian economy is doing relatively well, partly because of the ongoing actions of the Reserve Bank of India (RBI), which has slashed interest rates from 6.5% last year to the current 5.25%. 

Also, the economy will likely continue growing now that India has reached a deal with the United States. 

The next major catalyst for the USD/INR will be the upcoming US GDP and inflation report. Economists expect the economy grew by 3% in the fourth quarter after growing by 4.4% in the third quarter.

USD/INR technical analysis 

The daily timeframe chart shows that the USDINR exchange rate has rebounded in the past few months, moving from a low of 83 in May last year to the 91. It recently tumbled from the year-to-date high of 92.23 to a low of 90.05 after the US reached a deal with India.

It has now rebounded as it fills the gap it formed on February 2nd. The stock remains above the 50-day and 100-day Exponential Moving Averages (EMA). It has moved above the Major S&R level of the Murrey Math Lines tool.

The Relative Strength Index and the MACD have continued rising. Therefore, the most likely USD to INR outlook is bullish, with the next key target being the year-to-date high of 92.23. A move above that level will point to more gains, potentially to the ultimate resistance at 93.75.