The USD/INR currency pair opened on a flat note during Thursday’s Asian session, even as the Indian Rupee (INR) showed signs of broad underperformance against a basket of major global currencies. Traders and institutional investors have shifted into a wait-and-see mode, looking ahead to the Consumer Price Index (CPI) data for May.

This pivotal inflation report will play a critical role in shaping monetary policy expectations ahead of the August meeting of the Reserve Bank of India (RBI). 

Market participants are anticipating a marginal slowdown in headline inflation, which could reinforce arguments for further rate cuts, although the RBI has recently dialed down its accommodative stance. Aurudium provides a well-structured exploration of this issue, highlighting key insights throughout.

Inflation in Focus: CPI Data Likely to Ease

Economists forecast retail inflation to slow to 3.00% in May, down from 3.16% in April, potentially marking the lowest year-on-year inflation print since April 2019. The moderation in price pressures could be a green light for the RBI to continue monetary easing, especially as the economic recovery remains fragile amid external shocks and weak exports.

In its latest policy decision, the RBI shifted its stance from “accommodative” to “neutral”, implying that aggressive policy support may be limited going forward. The central bank already front-loaded stimulus by slashing the Repo Rate by 50 basis points to 5.5% and cutting the Cash Reserve Ratio (CRR) by 100 basis points to 3%.

This shift in language signals that while rate cuts may continue, they will likely be data-dependent. If CPI surprises to the downside, rate-cut bets for the August meeting could strengthen, pressuring the Rupee further.

Indian Rupee Weakens Broadly Despite Flat USD/INR

Despite the USD/INR pair remaining stable near 85.46, the Rupee showed signs of weakness against other currencies, reflecting investor uncertainty and cautious sentiment ahead of the CPI print. This underperformance comes amid foreign institutional outflows, with FIIs selling Rs. 446.31 crore in domestic equities on Wednesday.

Adding to the headwinds, the World Bank downgraded India’s FY26 GDP growth forecast by 40 basis points to 6.3%, attributing the revision to weaker export growth and persistent global trade headwinds. Nonetheless, India remains positioned as the fastest-growing major economy, which may limit downside risks in the medium term.

Global Macro Weighs on USD Outlook

The US Dollar (USD) has come under pressure, contributing to the flatness in USD/INR, despite the Rupee’s broader weakness. The US Dollar Index (DXY) has slipped to 98.30, its lowest level in over seven weeks, as market uncertainty builds around tariff policy decisions under the US Administration.

On Wednesday, the US President hinted at a possible extension of the 90-day tariff deadline, due to expire on July 8, signaling ongoing flexibility amid global trade negotiations. He stated he was “willing to extend trade deadlines but won’t need to,” while US Treasury Secretary Scott Bessent added that extensions were possible for countries negotiating in “good faith.”

This uncertainty in US trade policy has dented investor confidence and capped USD strength, although the Greenback may remain supported by safe-haven flows if market volatility rises.

Upcoming US PPI Data and Fed Outlook

Attention also turns to the upcoming US Producer Price Index (PPI) data for May, scheduled at 12:30 GMT. This will provide further insights into upstream inflation trends, helping investors assess whether businesses are passing on higher costs to consumers.

Earlier this week, the US CPI report for May showed moderate consumer inflation, suggesting that either the US’s tariff impact has not yet filtered through or that retailers are offloading pre-tariff inventory.

Despite inflation being contained for now, the Federal Reserve (Fed) is expected to remain cautious. Policymakers will likely delay any rate adjustments until there is greater clarity on fiscal and trade policy, meaning the Fed funds rate may stay on hold for the next few months.

Technical Analysis: USD/INR Outlook Turns Bearish

From a technical perspective, USD/INR is hovering near a weekly low around 85.47, with bearish momentum building as the pair trades below the 20-day Exponential Moving Average (EMA) at 85.48. This breakdown of a key dynamic support suggests a vulnerable short-term setup.

The 14-day Relative Strength Index (RSI) is lodged in the 40.00–60.00 neutral band, highlighting a sideways trend with potential for further downside.

On the support side, traders should monitor the June 3 low at 85.30, followed by the May 26 low at 84.78. A confirmed breach below these levels would deepen the downtrend. On the upside, resistance stands at the May 22 high of 86.10, with a breakout potentially opening the door to the 11-week high near 86.70.

Conclusion: All Eyes on Inflation and Policy Cues

In summary, while USD/INR remains flat, the Indian Rupee’s underperformance across broader currency pairs signals underlying market caution. The upcoming CPI data for May could be a game-changer for RBI policy guidance and set the tone for INR valuation in the coming weeks. Meanwhile, global macro developments, including US trade policy, tariff deadlines, and inflation trends in the US, are also shaping USD dynamics.

Traders should stay alert to the CPI release and monitor the Fed’s tone, the US President’s trade rhetoric, and technical indicators for positioning in the USD/INR pair. A combination of domestic inflation surprises and global uncertainties could spark heightened volatility, especially if policy expectations shift abruptly.