Indian Rupee slips as US Dollar stabilizes, RBI rate cut bets in focus

• USD/INR trades near 85.65 as the Indian Rupee weakens against a steady US Dollar.
• INR pressured by falling equities, rising oil prices, and FII outflows.
• RBI expected to cut rates for a third time; SBI hints at a possible 50 bps cut.

The Indian Rupee (INR) weakens against the US Dollar (USD) on Tuesday, giving back  Monday's gains as the Greenback stabilizes ahead of key US labor market data. The US Dollar is finding support after dropping to a six-week low in the previous day, with traders awaiting the JOLTS Job Openings report. 

The USD/INR pair is hovering above Monday's high, at the time of writing, trading around 85.65. The upward move reflects growing pressure on the Rupee, driven by rising Crude Oil prices, lackluster equity performance, and foreign fund outflows.

Indian equities extended losses on Tuesday, with the BSE Sensex falling 636.24 points to close at 80,737.51, while the Nifty 50 declined 174.10 points to settle at 24,542.50. Foreign institutional investors (FIIs) were net sellers in the cash segment, pulling out ₹2,589.47 crore worth of equities on Monday, according to exchange data.

Looking ahead, market focus will shift to the Reserve Bank of India's (RBI) upcoming Monetary Policy Committee (MPC) meeting, scheduled for June 4-6. The central bank is widely expected to deliver a third consecutive 25-basis-point (bps) rate cut, which would bring the benchmark repo rate down to 5.75%. The RBI had previously lowered the policy rate by 25 bps in February to 6.25% and again in April to 6.00%, as it continues to support economic growth amid softening inflation and global uncertainty.

India's recent macroeconomic data paints a broadly positive picture. The Consumer Price Index (CPI) inflation eased to 3.16% in April from 3.34% in March, comfortably below the Reserve Bank of India's 4% target, thereby strengthening the case for further monetary easing. At the same time, GDP expanded by a robust 7.4% YoY in Q1, supported by strong momentum in domestic demand and industrial activity.

Commenting on the policy outlook, Rajani Sinha, Chief Economist at CareEdge Ratings, said, "In this environment of easing inflation and heightened global uncertainties, we expect the MPC to maintain its focus on supporting the ongoing recovery in the growth momentum. The rate-cutting cycle that began in February will likely continue, with a further 25-bps reduction in the repo rate expected at the June meeting, while retaining an accommodative stance."

Meanwhile, in a more aggressive call, a recent State Bank of India (SBI) research report suggested that the RBI may opt for a 50-bps rate cut at the upcoming meeting to stimulate the credit cycle and counterbalance external uncertainties. The report noted that commercial banks' credit growth slowed to 9.8% as of May 16, against last year's growth of 19.5%.