USD/INR rises due to foreign outflows and increased demand for the US Dollar

June 5, 2025

The Indian Rupee’s Outlook on Thursday

The Indian rupee is expected to trade lower during the early European session on Thursday.
Heightened demand for the US dollar and outflows from foreign stocks are putting pressure on the INR.
The US trade balance and weekly unemployment claims will be released in the latter part of Thursday.

The Indian rupee (INR) is likely to dip on Thursday. There’s been a resurgence in demand for the US dollar (USD) from foreign banks and oil firms, which is affecting the Indian currency. Furthermore, the capital outflow from foreign stocks and reduced offshore non-deliveryable forward (NDF) activity before the Reserve Bank of India (RBI) monetary policy meeting may also hurt the INR.

On another note, there’s some speculation that the fluctuating tariff policies from US President Donald Trump, along with the growing fiscal deficits, could eventually weaken the dollar, potentially giving local currencies a bit of a boost after the House votes on a sweeping tax cut and spending proposal.

As for investors, they’ll be looking at the US trade balance and the first weekly unemployment claims set to be released later on Thursday. The RBI’s interest rate decision on Friday is anticipated with great interest, as many are predicting a third consecutive 25 basis point (BPS) cut. Meanwhile, US employment reports are also in focus, with expectations for the non-farm payroll (NFP) to show a growth of 130K jobs in May, although the unemployment rate is expected to hold steady at 4.2% during this time.

The Indian Rupee May Weaken Ahead of Key Events

Despite not performing as well as most of its Asian counterparts this year during a US dollar downturn, the Indian rupee is still predicted to gain slightly this year, according to a poll from financial strategists.
This year, the INR has struggled against the USD, showing some of the weakest performance in Asia, despite reports of unexpectedly robust growth in the previous quarter.
The HSBC Composite Purchase Manager Index (PMI) for India fell from 61.2 in April to 59.3 in May. Meanwhile, the service PMI also dropped to 58.8 in May, which was below both prior assessments and market predictions of 61.2.
India’s service PMI recorded 58.8 for May, which generally aligns with stable trends seen in recent months, supported by strong international demand that has boosted service activities, evidenced by a rise in the new export business index since April.
According to the Institute for Supply Management (ISM), the US Services PMI fell to 49.9, lower than the market consensus of 52.0.
The US ADP private sector employment increased by 37,000 in May, which, while positive, fell short of the market expectation of 115,000 after a revised count of 60,000 for April.
Neil Kashkari, president of the Minneapolis Federal Reserve, noted that there are signs of a cooling job market, indicating that central banks may need to remain cautious as they evaluate the economy’s response to uncertainty.

USD/INR Trends and Technical Outlook

The Indian rupee will likely see soft trading today. The USD/INR pair is resuming an upward trend while trading above the 100-day exponential moving average (EMA). Additionally, the 14-day relative strength index (RSI) is above the midline, sitting around 57.60, suggesting that a bullish trend could continue in the short term.

The immediate resistance for USD/INR is noted at 86.00, a psychological mark and a peak observed on June 4th. If trading holds above this level, it could potentially open the path to higher levels, such as 86.71 on April 9th and up to 87.30 on March 12th.

Conversely, the initial support level stands at 85.30, recorded on June 3rd. A drop below this mark could signal a resumption of the downward trend, possibly reaching as low as 85.04, the lowest point seen on May 27th.

Indian Rupee FAQ

The Indian rupee (INR) is highly susceptible to external influences. Factors such as crude oil prices, the US dollar value (given that most trade is conducted in USD), and levels of foreign investment significantly impact its valuation. Moreover, interventions by the Reserve Bank of India (RBI) in the Forex market and the interest rates set by the RBI are critical in determining the rupee’s stability.

The RBI is actively working in foreign exchange markets to maintain stable rates that foster trade. It also aims to keep inflation at its 4% target by adjusting interest rates. Generally, higher interest rates bolster the rupee due to the “carry trade,” where investors borrow from low-interest countries to invest where profits are higher.

Various macroeconomic elements can influence the rupee’s value, such as inflation rates, interest rates, GDP growth rates, trade balances, and foreign investment inflows. When economic growth rises, it attracts more foreign investment and increases demand for the rupee. A less negative trade balance can strengthen the rupee, while higher interest rates, particularly real interest rates, can also be advantageous, drawing in more direct and indirect foreign investments.

High inflation typically has a negative impact on a currency, especially if it’s higher than that of other nations, as it suggests a devaluation caused by an excess supply. Inflation can raise the cost of exports and increase the rupiah required for imports, further weakening the currency. Higher inflation often prompts the RBI to increase interest rates, which can ultimately be beneficial for the rupee due to heightened interest from international investors. Conversely, a lower inflation rate has the opposite effect.