USD/INR weakens ahead of Indian WPI inflation release

• The Indian Rupee rebounds in Tuesday's early Asian session.
• A surge in oil prices, continued outflows from foreign investors, and a rally in USD might weigh on INR. 
• India's WPI inflation data and US PPI reports will be in the spotlight later on Tuesday. 

The Indian Rupee (INR) recovers some lost ground on Tuesday after reaching a fresh all-time low in the previous session. The Reserve Bank of India (RBI) is likely to intervene to slow down the INR's depreciation, selling the USD in the spot and the forward markets. However, the local currency remains fragile amid a rise in crude oil prices and a massive withdrawal of foreign capital from Indian equities. Additionally, a stronger US Dollar (USD) after upbeat US employment data led to an expectation that the US Federal Reserve (Fed) will go for fewer interest rate cuts this year, dragging the INR lower. 

Looking ahead, traders will monitor India's Wholesale Price Index (WPI) inflation data, which is due later on Tuesday. On the US docket, the Producer Price Index (PPI) for December will be released. Also, the Fed Kansas City President Jeff Schmid is set to speak later in the day. 

Indian Rupee remains vulnerable amid multiple headwinds

• India's retail inflation rate, measured by the Consumer Price Index (CPI), eased to 5.22% YoY in December from 5.48% in November, according to the Ministry of Statistics and Programme Implementation on Monday. This reading came in softer than the expectation of 5.3%. 
• India's Consumer Food Price Index (CFPI), which measures food inflation, recorded a year-on-year increase of 8.39% for December 2024. 
• "RBI will allow the weakness as demand keeps moving up and supplies dwindle," said Anil Kumar Bhansali, Head of Treasury and Executive Director, Finrex Treasury Advisors LLP.
• The Indian central bank on Friday noted that the country's forex reserves in the week ended January 3 declined by USD 5.693 billion to USD 634.585 billion. 
• Global funds have pulled about $2 billion from local shares so far this year and sold a net $705.5 million of fixed-income securities on January 8.
• Markets are now pricing in one rate cut from the Fed in 2025, down from roughly two quarter-point cuts priced at the start of the year.

USD/INR maintains the positive picture, overbought RSI warrants caution for bulls in the near term

The Indian Rupee trades firmer on the day. The bullish outlook of the USD/INR pair remains intact as the price has formed higher highs and higher lows while holding above the key 100-day Exponential Moving Average (EMA) on the daily chart. Nonetheless, further consolidation cannot be ruled out as the 14-day Relative Strength Index (RSI) moves beyond the 70.00 mark, indicating the overbought condition.

The first upside target to watch is an all-time high of 86.69. A decisive bullish breakout above this level could pave the way to the 87.00 psychological level. 

On the other hand, the initial support level for the pair emerges at 85.85, the low of January 10. A move back below the mentioned level could see a drop to 85.65, the low of January 7, followed by 85.00, a round figure.