The Indian rupee crashed to a record low this month, making it one of the worst-performing currencies in the Asian region this year. The USD/INR exchange rate rose to a record high of 88.86, up by over 6.1% from its highest level this year. 

RBI interest rate decision will impact the Indian rupee

The USD/INR exchange rate will be in the spotlight this week because of the upcoming Reserve Bank of India (RBI) interest rate decision, which is scheduled to happen on Wednesday this week.

Economists have a mixed opinion on what to expect in this meeting. Some of them expect the bank to cut interest rates by 0.25%, while others see it maintaining rates unchanged.

The central bank has been in a rate-cutting cycle this year after Narendra Modi replaced the hawkish Shaktikanta Das with the more dovish Sanjay Malhotra.

It has slashed rates from a high of 6.5% in January to 5.50% today, and the bank may take the benchmark to 5.25% in this meeting.

The bank may cut rates because inflation has moved downwards in the past few months and is below its target. While prices rose to 2.07% in August, it remained much lower than last year’s high of 6.21%.

The bank has a reason to cut interest rates now that India and the US are not in the best of terms. Donald Trump added a 50% tariff on Indian exports to the United States, a move that will hit goods worth billions of dollars a year.

Trump also sent shockwaves this month when he decided to change the H1-B migration policy by adding a $100,000 fees, a move that will affect India the most as companies will not be comfortable paying all that money to hire foreigners. 

Some of these companies may instead decide to open or expand their offices in India to attract the country’s talent.

A potential impact of the changes in the visa rules is that remittances from the United States to India will drop gradually in the coming years.

Therefore, by cutting interest rates, the RBI will be helping to support the Indian economy as it faces major challenges. Rate cuts, however, will reduce the yield of government bonds, and drive the Indian rupee lower.

US nonfarm payrolls data 

The next important catalyst for the USD to Indian rupee exchange rate will be the upcoming US non-farm payrolls data on Friday.

The US jobs report has always been important because it is part of the Federal Reserve dual mandate, which also includes inflation.

Recently, however, the labor market has played a substantial role in monetary policy in the United States. A series of weak NFP numbers have pushed the Federal Reserve to start focusing on the labor market.

Therefore, a weak jobs report will likely push the Fed to continue cutting  interest rates in the coming meeting in October.

Economists expect the jobs report to show that the economy created just 39,000 jobs in August after creating another 22,000 in July.

The USD/INR exchange rate will also react to the upcoming job vacancy numbers by the Bureau of Labor Statistics and the ADP private payrolls data.

USD/INR technical analysis 

USDINR chart | Source: TradingView

The daily timeframe chart shows that the USD/INR exchange rate bottomed at 83.75 in late April and started climbing and reached an all-time high of 88.86 this month.

This price action was notable as it happened as the US dollar index (DXY) crashed. The pair has remained above the important resistance level at 87.97, its highest level in February and August. This price was the upper side of the cup-and-handle pattern.

Therefore, the most likely scenario is where the pair drops to the support at 87.9 and then resumes the upside.

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