USD/INR extends gains due to Fed's cautious policy outlook, India-Pakistan tensions

• Indian Rupee loses ground due to weakened market sentiment following the Fed's cautious policy outlook.
• The Fed acknowledged growing risks related to inflation and unemployment, injecting fresh uncertainty into markets.
• Heavy artillery exchanges have been reported along the Line of Control, which separates Indian- and Pakistan-administered Kashmir.

The Indian Rupee (INR) loses ground against the US Dollar (USD), extending its losses for the third successive session on Thursday. The USD/INR pair appreciates amid the Federal Reserve's (Fed) cautious policy outlook. As expected, the Fed held interest rates steady at 4.25%-4.50%, but its statement acknowledged growing risks related to inflation and unemployment, injecting fresh uncertainty into markets. 

The INR came under pressure amid heightened cross-border tensions between India and Pakistan, which have fueled increased risk aversion. India conducted strikes on nine targets in Pakistan as part of "Operation Sindoor," launched two weeks after a deadly militant attack on tourists in Indian-administered Kashmir. Intense artillery exchanges have also been reported along the Line of Control separating Indian- and Pakistan-administered Kashmir.

Recent data showed India's inflation rate dropped to its lowest level in over five years in March, falling well below the Reserve Bank of India's (RBI) 4% mid-point target. Meanwhile, GDP growth moderated to 6.5% in the last fiscal year, down from 8.2% previously, prompting the central bank to prioritize growth concerns.

Indian Rupee depreciates as market sentiment weakens amid Fed's cautious tone

• The US Dollar Index (DXY), which tracks the value of the US Dollar (USD) against a basket of six major currencies, is retracing its recent gains from the previous session and trading around 99.70 at the time of writing. However, the DXY may regain its ground due to the Federal Reserve's (Fed) cautious policy outlook.
• The Fed held interest rates steady at 4.25%-4.50% on Wednesday, but its statement acknowledged growing risks related to inflation and unemployment, injecting fresh uncertainty into markets. According to the CME's FedWatch Tool, market participants are still anticipating a quarter-point rate cut in July.
• Fed Chair Jerome Powell noted during the press conference that US trade tariffs could obstruct the Fed's objectives for inflation and employment in 2025. Powell indicated that persistent policy instability may force the Fed to adopt a more patient, 'wait-and-see' stance on future rate adjustments.
• US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer are set to meet with Chinese Vice Premier He Lifeng in Geneva over the weekend, marking the first high-level talks since the US imposed tariffs that escalated into a global trade dispute.
• China's Ministry of Commerce stated that, after carefully evaluating US proposals and considering global expectations, national interests, and industry feedback, Beijing has agreed to engage in the upcoming negotiations.
• The HSBC India Composite PMI came in at 59.7 in April 2025, just below the flash estimate of 60.0 but higher than March's 59.5, signaling the 45th straight month of private sector expansion. Meanwhile, the Services PMI was revised down to 58.7 from the preliminary reading of 59.1. Despite the downward revision, it remained above both the March figure and market expectations of 58.5, extending the services sector's growth streak to 45 consecutive months.
• Traders anticipate India's 10-year government bond yield to remain in the 6.30%-6.40% range this week, with attention centered on bond purchases and geopolitical developments between India and Pakistan.
• The recent decline in yields is driven by expectations of further rate cuts and the Reserve Bank of India (RBI) maintaining surplus liquidity in the banking system through ongoing open market operations (OMOs), according to Reuters.

USD/INR tests nine-day EMA resistance sitting above 84.50 

The Indian Rupee depreciates, with the USD/INR pair hovering around 84.70 on Thursday. Daily chart technicals suggest a continued bearish outlook, as the pair remains within a descending channel pattern. Additionally, the 14-day Relative Strength Index (RSI) also remains below 50, suggesting sustained bearish momentum.

On the downside, support is seen near the lower boundary of the descending channel at approximately 84.00. A break below the channel could accelerate the downward move, potentially pushing the pair toward its eight-month low at 83.76. 

The USD/INR pair is testing to break above the nine-day Exponential Moving Average (EMA) near 84.70. A sustained move above this level could boost short-term bullish momentum, targeting the descending channel's upper boundary near 86.10, with additional resistance at the two-month high of 86.71.

USD/INR: Daily Chart