The USD/INR exchange rate has been in a strong uptrend this month, even as the US Dollar Index (DXY) slumped. It rose from a low of 83.75 on May 2nd to a high of 86.10, the highest point since April 12.
Wall Street analysts are bullish on the Indian rupee
The USD/INR exchange rate has soared in the past few weeks, even as Wall Street analysts turned bullish on the rupee. In a recent note, analysts at Bank of America (BoA) wrote that the currency would end the year at 84, implying a 2% jump from the current level.
The bullish rupee forecast was a reversal from its previous prediction of 87. BoFa argued that policies by the Reserve Bank of India (RBI) and the government would draw foreign investors to the country.
The analysts noted that foreign investors have already pumped $2.5 billion to Indian shares this quarter after withdrawing $5.2 billion in Q1. Foreign investment in Indian stocks boosts the local currency since it happens in the Indian rupee, while the capital comes in the form of US dollars.
BoFa’s forecast for the Indian rupee aligns with those of other top banks such as Goldman Sachs, MUFG, and ANZ. Analysts at Goldman Sachs expect the currency to strengthen to 84, while MUFG has revised its forecast from 87.5 to 84. ANZ, meanwhile, predicts it will rise to 85.
RBI rate cut odds rise
The USD/INR exchange rate has reacted to the recent actions by the Reserve Bank of India (RBI). After holding interest rates steady in 2024, the bank, under Sanjay Malhotra, has embarked on a rate-cutting cycle. It slashed interest rates in February and April, and analysts expect it to do the same in the next meeting in June.
The RBI has justified its interest rate cuts, citing the falling inflation and ongoing trade jitters. Recent data showed that the headline Consumer Price Index (CPI) dropped to 3.16% in April, down from last year’s high of 6.2%. Inflation has dropped in the last four consecutive months and has been at its lowest since 2019.
The falling inflation is happening at a time when there are concerns about the Indian economy. Recent data shows that the economy will grow by 6.3%, making it the fastest-growing major economy. It will overtake Japan and become the fourth-biggest economy. Before Donald Trump’s trade war, analysts were predicting a growth rate of 6.5%.
US Dollar Index crash to continue
Meanwhile, there are signs that the US Dollar Index (DXY) will continue falling this year. As we wrote here and here, the index has formed an inverse cup-and-handle pattern, a popular bearish continuation pattern.
If this pattern works out well, it means that the index will crash to around $90 in the coming months. Such a crash would benefit foreign currencies like the Indian rupee.
USD/INR technical analysis
USDINR price chart | Source: TradingView
The eight-hour chart shows that the USDINR exchange rate rose from a low of 83.73 on May 2 to a high of 86 this month. While the pair has moved above the 50-period moving average, it has formed a rising wedge pattern.
A rising wedge is made up of two ascending and converging trendlines. In most cases, the bearish breakdown happens when the two lines are about to converge, as is happening with the USD/INR pair.
Such a move will point to more downside, potentially to the psychological point at 84 as top analysts expect. The bearish forecast will become invalid if it rises above the key resistance point at 86.
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