• The Indian Rupee counters strong US Dollar’s upside move due to RBI’s intervention.
• The Fed raised interest rates on Wednesday and signaled more this year.
• Financial markets expect the RBI to start the interest rate hike cycle soon.

The Indian Rupee (INR) finds some buying interest against the US Dollar in the early session after a weak opening on Thursday. According to a Reuters report, the Indian central bank has likely intervened to limit the decline in the Indian Rupee. The report also showed that traders said the state-run banks were spotted offering US dollars, most likely on behalf of the Reserve Bank of India (RBI).

The RBI’s intervention was highly likely as the USD/INR pair was anticipated to open strongly, following Federal Reserve’s (Fed) hawkish interest rate decision on Wednesday that led to a sharp rally in the US Dollar. In India’s afternoon trade, the USD/INR pair trades marginally lower to near 95.90, but is still close to its seven-week high of 96.10.

As of writing, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades firmly near its six-week high of 100.37.

What happened at the Fed meeting

On Wednesday, the Fed broke its five-meeting hold streak and hiked interest rates by 25 basis points (bps) to the 3.75%-4.00% range. The Fed was widely anticipated to tighten the monetary policy as the latest Consumer Price Index (CPI) readings signaled stickiness in inflationary pressures.

As expected, Fed Chairman Kevin Warsh didn’t deliver any remarks regarding the monetary policy outlook, but warned of high inflationary pressures. “Inflation is too high and has been for too long,” Warsh said.

However, the Fed’s dot plot that shows where policymakers collectively see Federal Fund Rates heading in the medium and long term signaled that 16 of 18 policymakers expected at least one interest rate hike this year.

Fed hike reinforces higher-for-longer stance

Economists at NBC Economics and Strategy argue that the updated dot plot pointing to “relatively broad support for more restrictive monetary policy for a significant period of time.” In their view, the Fed “doesn’t see a return to a 3.5%-3.75% range until the end of 2029,” underscoring a higher-for-longer policy bias.

NBC’s team sees “a 4.25% upper bound target representing the peak of what could be a brief tightening cycle,” with the timing and scale of eventual cuts likely to be “dictated by the sustainability of the economic expansion (i.e., the AI boom).”

RBI’s monetary tightening fears come into picture as inflation accelerates

Financial markets start pricing in the possibility that the RBI could tilt to starting a monetary tightening cycle to counter rising inflationary pressures. India’s retail Consumer Price Index (CPI) has been growing at a faster pace consistently from last 10 months and has reached 4.82% Year-on-Year (YoY) in August, strengthening the case of an interest rate hike in the near term.

Analysts at MUFG said that “a gradual broadening of price pressures is likely to keep headline inflation above 5% in second half of the fiscal year, underscoring the need for a tighter policy bias.”

MUFG adds that “recent developments, including a sustained rise in crude prices, tightening global financial conditions, firm domestic growth and signs of broadening in core pressures, strengthen the case for a shallow 50-bp hike in second half of FY27, making October’s meeting a live one.”

USD/INR Technical Analysis

In the daily chart, USD/INR trades at 95.90. The pair holds above the 20-day exponential moving average (EMA) at 95.41, keeping the near-term bias bullish as price grinds higher from last week’s lows.

The Relative Strength Index (RSI) at 59.9 sits in positive but not overbought territory, which hints at constructive upside momentum without signs of exhaustion yet.

On the downside, immediate support is seen at the 95.80 area, where the current price acts as a short-term pivot, followed by stronger demand near the 20-day EMA at 95.41. Looking up, the pair aims to revisit the all-time high near 97.00.