The Rupee's Slippery Slope: USD/INR Shorts Find Foothold in Policy Divergences

The U.S. labor market's resilience, underscored by the May 2025 jobs report showing 139,000 nonfarm payrolls and a 4.2% unemployment rate, has reinforced the dollar's standing as traders brace for Federal Reserve caution. Meanwhile, the Reserve Bank of India (RBI) has pivoted toward rate cuts, front-loading easing to support a slowing economy. This divergence in monetary policy trajectories has created a compelling short opportunity in the USD/INR currency pair, with the technical range of 85.00–86.00 acting as a springboard for further rupee weakness.

Policy Divergence Fuels the Trade

The Fed's reluctance to cut rates contrasts sharply with the RBI's aggressive easing cycle. While the Fed has held rates steady at 4.25%–4.5% since April 2025, citing lingering inflation risks from trade policy uncertainties, the RBI slashed its repo rate by 50 basis points in June to 5.50%, with further cuts signaled to combat tepid growth. This gap in policy stances is the linchpin of USD/INR's upward bias.

The Fed's “data-dependent” approach—where even a modest NFP print above 100,000 keeps rate-cut odds low—has left traders pricing in just 64 basis points of cuts by year-end, with a 25% chance of a July cut evaporating after June's 147,000 jobs gain. In contrast, the RBI's inflation forecast of 3.7% for FY2025/26 (down from 4.0%) provides room to ease further, potentially pushing the repo rate to 5.25% by December. This asymmetry in policy paths reduces the rupee's yield advantage, favoring dollar appreciation.

Technical Catalysts: The 85.00–86.00 Sweet Spot

Technically, USD/INR has consolidated near 85.50 since mid-2025, with the 85.00–86.00 range acting as a battleground. A break above 86.20 could open the door to 87.50, a level last tested in early 2025. Conversely, support at 84.80 (the 200-day moving average) remains critical. The pair's RSI (14) has remained neutral at 50–55, suggesting no overbought/oversold extremes—ideal conditions for a trend continuation.

Catalysts to Watch

• Fed Policy Meetings (July, September): A delayed rate cut or hawkish tone from Chair Powell could lift the dollar.
• RBI's August Policy Review: Expect another 25 bps cut, reinforcing the rupee's downward pressure.
• Trade Tensions: U.S.-India trade talks on tariffs (scheduled for August) could spark volatility if unresolved, favoring dollar bulls.

Investment Strategy: Short USD/INR with a Risk-Managed Approach

• Entry: Initiate short positions at 85.80, targeting 87.00–87.50 by year-end.
• Stop-Loss: Place above 86.20 to contain losses if the Fed pivots abruptly.
• Profit-Taking: Exit 50% of the position at 86.80, with the remainder held until 87.50 or policy clarity.

Risks to the Thesis

• Fed Surprise: An earlier-than-expected rate cut (unlikely unless inflation collapses) could cap USD gains.
• India's Surprises: A rebound in GDP growth (Q2 data due in August) or fiscal stimulus could boost the rupee.

Conclusion

The USD/INR pair is primed to climb as the Fed's hawkish patience clashes with the RBI's accommodative stance. With the technicals aligned and key catalysts on the horizon, now is the time to capitalize on this divergence. Short USD/INR with discipline—this is a trade, not a bet on permanent dollar dominance. As always, monitor geopolitical risks (e.g., U.S.-India trade disputes) that could amplify volatility.

Stay vigilant, and let the policy gap do the heavy lifting.