Indian rupee pares losses below 78.00 amid rumors of a rate rise by the Reserve Bank of India

During the first hour of Tuesday's Indian trading day, the USD/INR extends its fall from a two-week high and retests daily lows near 77.70.

In doing so, the Indian rupee (INR) pair appears to be preparing for the Reserve Bank of India's (RBI) rate rise while paying some attention to the broad US dollar gains and Foreign Portfolio Investors' (FPI) exit from Indian markets. The cause may possibly be related to recent risk-positive news reports from China.

Despite this, an eight-year high in Indian inflation has prompted market speculation of a significant rate rise by the RBI at its meeting on Wednesday. "All 47 experts in a Reuters survey predicted that the repo rate will be lifted for a second consecutive month from 4.40 percent to a range of 25 to 75 basis points," said Reuters.

The survey continues, "India's bond markets are also anticipating liquidity tightening measures, with many experts projecting a 50 basis point hike in the cash reserve ratio for banks as the RBI strives to restore monetary conditions to pre-crisis levels."

In addition, news articles indicating confidence in Asia's leading economy, China, contribute to the INR's strength. China Securities Journal (CSJ) lauded the nation's viral control and policy stimuli while predicting economic growth in the second half of 2022 (H2). Previously, Beijing's ability to overcome the pandemic and citing preparations to recover from the economic loss with faster unlocks, along with US President Joe Biden's likely easy stance for China, as far as demonstrating readiness to remove Trump-era tariffs, appeared to support sentiment and test INR bears.

Alternatively, a substantial outflow of foreign cash and rising oil costs, a significant strain on the Indian budget deficit, provide difficulties for USD/INR sellers. Yesterday, foreign investors sold the most Indian government bonds in a single session in a month, according to NewsRise, citing Reuters.

In addition, increased speculation over the Fed's faster/heavier rate rises, particularly following Friday's US employment report, drives the USD/INR exchange rate. A robust US Nonfarm Payrolls (NFP) report and the last dose of hawkish Fedspeak before the blackout norm helped US Treasury rates conclude the week on a positive note, reversing a three-week downward trend. According to the most recent data, market participants predict a rate rise of 0.50 percent by the Federal Reserve in September with a probability of 70 percent, up from 30 percent a week earlier.

The US Goods and Services Trade Balance for the upcoming month, projected at $-89.5B compared to $-109.8B in prior readings, can excite intraday traders, but the RBI decision on Wednesday and the US Consumer Price Index on Friday will garner the most attention (CPI).

Technical Evaluation

A daily closing above 77.85 looks essential for USD/INR bulls to target the May record high at 78.15. Meanwhile, 77.35 and March's peak around 77.17 restrict the pair's near-term fall.