USD/INR gathers strength as geopolitical risks, foreign fund outflows drag Indian Rupee lower

• The Indian Rupee softens in Wednesday’s Asian session. 
• Sustained portfolio outflows and geopolitical risks could weigh on the INR, but RBI interventions might cap its downside. 
• Investors await the speeches from the Fed’s Cook and Bowman on Wednesday. 

The Indian Rupee (INR) loses traction on Wednesday. The local currency remains under some selling pressure due to the renewed US Dollar (USD) demand from importers and rising geopolitical tensions after Russian officials said that Ukraine used US ATACMS missiles to strike Russian territory for the first time, while Russian President Vladimir Putin approved an updated nuclear doctrine. 

Furthermore, sustained portfolio outflows contribute to the INR’s downside. However, any significant depreciation of the Indian Rupee might be limited as the Reserve Bank of India (RBI) is likely to sell the USD to support the INR.

In the absence of top-tier economic data released from the US and India, the USD price dynamics will continue to play a key role in influencing the pair. The Federal Reserve (Fed) Lisa Cook and Michelle Bowman are scheduled to speak later on Wednesday. 

Indian Rupee remains vulnerable amid mounting geopolitical tensions

• “Mild weakness in the dollar will not lead to any major appreciation in the rupee because the RBI will look to replenish its foreign exchange reserves, but if the dollar index moves 2-3% lower, we may see half a per cent of move (in the rupee),” noted Nitin Agarwal, head of treasury at ANZ India.
• Foreign Portfolio Investment (FPI) inflows into India are estimated to remain positive in FY25, with an expected inflow of USD 20-25 billion, according to the Bank of Baroda.
• Markets have pared bets for a 25 basis points (bps) interest-rate cut at the December meeting to less than 59%, down from 76.8% a month ago, according to the CME FedWatch Tool.
• The US Building Permits declined by 0.6% from 1.425 million to 1.416 million in October. Meanwhile, Housing Starts fell by 3.1% from 1.353 million to 1.311 million during the same period. 
• Kansas City Fed President Jeffrey Schmid said it remains uncertain how far interest rates can fall, but the recent cuts by the Fed indicate confidence that inflation is heading toward its 2% target.

USD/INR’s bullish outlook remains in play

The Indian Rupee weakens on the day. However, the constructive view of the USD/INR pair remains intact, with the price holding above the ascending channel throwback support on the daily chart. The upward momentum of the pair is reinforced by the 14-day Relative Strength Index (RSI), which stands above the midline near 65.55, suggesting that the path of least resistance remains to the upside. 

The all-time high of 84.45 acts as an immediate resistance level for USD/INR. A break above this level could pave the way to the 85.00 psychological level.

In the bearish case, any follow-through selling below the resistance-turned-support level at 84.35 could be enough to attract some sellers and take the pair back down to the 84.00-83.90 region, representing the round mark and the 100-day EMA.