The USD/INR currency pair has demonstrated notable strength, recovering ground even as the broader US dollar weakens against major global currencies. This movement occurs against a backdrop of rising Indian bond yields and significant uncertainty surrounding United States trade policy, creating complex dynamics in foreign exchange markets.
Indian economic data has been encouraging, with business activity showing robust expansion. The HSBC Manufacturing PMI rose from 55.4 in January to 57.5 in February, while the Services PMI reached 58.4. The composite PMI hit 59.3, its highest level in months, indicating strong sectoral growth. Concurrently, Indian bond yields have jumped, with the 10-year yield rising to 6.73% and the 30-year nearing 7.43%, pressured by rising energy prices and inflation concerns.
The surge in bond yields is partly attributed to the ongoing crude oil price rally, fueled by elevated geopolitical risks. Former US President Donald Trump warned Iranian officials to reach a deal within 15 days, raising fears of a potential US attack on Iran that could significantly impact oil prices. As a country that imports all its oil, India is particularly vulnerable to such price shocks, which could affect its manufacturing sector and inflation. India's headline Consumer Price Index (CPI) rose to 2.75% in January from 1.33% in December, though it remains within the Reserve Bank of India's (RBI) 2-4% tolerance band.
Despite these pressures, the Indian economy is performing relatively well, supported by RBI actions including interest rate cuts from 6.5% to the current 5.25%. The USD/INR pair recently traded around 82.45, representing a 0.8% recovery, even as the US Dollar Index (DXY) declined by 1.2%. Analysts attribute the rupee's resilience to India's improving fundamentals: a narrowed current account deficit (1.2% of GDP), increased foreign institutional investment in government bonds ($2.3 billion in February 2025), and potential strategic RBI intervention. India's GDP growth projection of 6.8% for FY 2025-26 contrasts with an expected 2.1% expansion in the US, supporting currency appreciation.
The recovery occurs amid significant US trade policy uncertainty, as the Biden administration reviews tariff structures and Congress debates new legislation. This ambiguity reduces dollar demand and creates market volatility. However, India's strategic trade positioning—strengthening relationships with EU and UAE partners and diversifying export destinations—has helped insulate its economy.
Technical analysis of the USD/INR chart shows the pair rebounding from a low of 83 last May to around 91, remaining above key moving averages. The Relative Strength Index and MACD indicate continued upward momentum, with analysts targeting the year-to-date high of 92.23. The next major catalysts for the pair will be upcoming US GDP and inflation reports, with economists expecting 3% growth in Q4.
